Exponential moving average (EMA)
The exponential moving average gives more weight to recent prices: it reacts to trend changes sooner than the simple average.
Instead of treating all prices equally, the EMA gives more weight to the latest ones and less and less to older ones. That's why it follows the price more closely and is the basis of other indicators, such as the MACD.
How it's calculated
You start with a multiplier k = 2 / (N + 1). Each day: today's EMA = today's price × k + yesterday's EMA × (1 − k). The first value is usually the simple average of the first N prices.
Worked example
With N = 10 the multiplier is 2 / 11 = 0.1818. If yesterday's EMA was €50 and today the stock closes at €53: 53 × 0.1818 + 50 × 0.8182 = 9.64 + 40.91 = €50.55. The EMA rises by €0.55, about a fifth of the distance between the price and the average.
How to read it
It's read like the simple average: price above the EMA, positive trend; below, negative. Many compare a short EMA with a long one: when the short one crosses above the long one it's a bullish signal.
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