Name, Sometimes Called:
Exponential Moving Average - Five Period
Five Period EMA
Exponential Smoothing
Brief Description:
The Exponential
Moving Average (EMA) is one of a number of smoothing techniques.
The EMA is an excellent compromise between the weighted moving average,
which tends to be overly sensitive, and the simple moving average,
which tends to be too sluggish. It is also one of the simplest moving
averages to calculate, requiring only today’s raw data and yesterday’s
EMA.
Definitions, Formulas:
As indicated by the title of this TAI, we use n
(the total number of periods) = 5.
The TAI is then
EMA(5)(CTODAY) = (CTODAY
* k ) + [ EMA(5)(CYESTERDAY) *
(1 – k) ]
where
EMA(5)(CTODAY) = today’s five-period
EMA
CTODAY = today’s closing price
EMA(5)(CYESTERDAY) = yesterday’s
five-period EMA of closing price
k = 2/(n+1), the exponential smoothing constant, here
= 0.3333 for n = 5
One writer suggests using an n-day simple
moving average on the first day to approximate EMA(5)(CYESTERDAY)
in the formula.
Positive Development Calculation:
For this TAI, a new positive development (NPD)
occurs when today’s closing price crosses above yesterday’s five-day
EMA of the closing price, that is, when CTODAY
x+ EMA(5)(CYESTERDAY).
This TAI is no longer positive when today’s closing price crosses
below yesterday’s five-day EMA of the closing price, that is, when
CTODAY x- EMA(5)(CYESTERDAY).
If this TAI is still positive tomorrow, it will no longer be new,
but will be a cumulative positive development (CPD).
If this TAI was a new positive development (NPD)
yesterday, and is still positive today, then it becomes a cumulative
positive development (CPD).
History:
The EMA is one of a number of smoothing techniques.
See moving averages in our glossary
for the list and explanations.
The EMA is an excellent compromise between the weighted
moving average , which tends to be overly sensitive, and the
simple
moving average, which tends to be too sluggish. It is also the
simplest moving average to calculate, requiring only today’s raw
data and yesterday’s EMA.
This chart shows the five-period EMA indicator applied to Panera
Bread (PNRA) between April and October 2005. There are several green
vertical lines indicating new positive developments (NPD) and red
vertical lines when those are no longer positive developments (NLPD).
There is one indicated whipsaw. On the chart there are more NPD,
NLPD and whipsaws than we have indicated. EMA5 responds so quickly
to changes in price there is a high potential for damaging whipsaws.
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