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Chapter 11, Part III. Exponential Moving Average. Page 2

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 17, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Commander in Pips: Well, in fact, this is not crucial for you to know the formula, because software will do this automatically. But still, I suppose this will be useful, try to calculate it, at least once. Ok, I do it by myself. Let’s calculate the same 7-period MA, but using exponential way of averaging:

    Period NTotal number of periods (n)SF=2/(n+1)Close price P(t)EMA(t-1)EMA(t)
    Here we use the same close prices and candles as in previous part, when we’ve calculated SMA. Take a note, that EMA(t-1) value for the 7th period (most distant in time) is a close price of 8th bar, that stands before our seven consecutive close prices, that directly used in calculation. Now look at the chart:

    Chart #1 EUR/USD Daily

    Our estimation of 7-period EMA is different from software’s calculation for 2 pips due rounding. But don’t be afraid – you will not have to do this manually. Let’s better to see, how the qualities of EMA manifest compares to SMA. In the circle we see that the EMA is above the SMA. This is because during the recent 4 periods, the market shows nice thrust move up. And, as we know, the EMA puts more weight onto the most recent periods. That’s why it shows most recent sentiment more clear.

    If you take a look at previous retracement, when 4 consecutive black candles have appeared – we can see the same – EMA moved below SMA and has shown sharper reaction to sentiment changing.

    From this perspective it appears, that an EMA better shows what traders are doing now, than SMA.

    Modified Moving Average (MAV)

    We will not speak much about this type of MA, because it does not have some exceptional qualities. But it does exist and we just specify formula for its calculation:

    MAV(t)=MAV(t-1)+(P(t) -MAV(t-1))/n

    Maybe, sometime you will need it.

    P.S. This lesson was written by Sive Morten, who has been working for a large European Bank since April of 2000, and is currently a supervisor of the bank's risk assessment department. Sive's knowledge of forex market and banking industry is vast and quite complete. If you have any specific questions about forex, banking industry, or any other financial instruments, please post them on the next page and Sive should answer soon.

    Note: FPA ranks are earned in the battles against scam, not in the classroom.
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