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.
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 1⁄150 = 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.
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).