Introduction to signal generation - moving average exponential

The exponential average index crossover uses an exponential weighted average instead of a simple one. If the index crosses the average, it is seen as a tradsignal, if crossing from top it means a sell signal, crossing from bottom means a buy signal.

					Weights for each day of exponential average calculation

Fig. 1 Weights for each day of EMA150

While the simple moving average uses the same ‘weight’ for each day of its timewindow, the exponential average formula uses different weights as seen in figure 1. For an SMA150 each day would weight 1150 = 0.66%. The exponential calculation gives a higher weight to the days nearer at the starting point, and a lower weight to days which are longer back.

					Example exponential moving average for the DAX

Fig. 2 Example of a exponential moving average for the DAX

Because of this weighting, the exponential average formula reacts quicker on recent price changes, und is often much nearer at the index an simple one (see SMA index crossover fig. 1).