The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

Moving Averages

Let us now calculate a nine-day EMA. The first thing we need to do is deter-

mine the exponential ratio for a nine-period EMA, which is just [2/(9 + 1)] = 0.1

(i.e., a 10 percent EMA). Hence, the EMA for the next three days is calculated as

follows:

EMA Day 1 Latest Close 0 1 Previous EMA 1 0 1

28

( ) (. ) ( (. ))

($

= ×+ ×−

=×00 1+×=30 0 9 29 80. ) ($. ) $.

EMA Day2 New Close 0 1 PreviousEMA 1 0 1

26 0 1

( ) (. ) ( (. ))

($. ) (

= ×+ ×−

=×+$$. ×=. ) $. 29 80 0 9 29 42

EMA Day 3 New Close 0 1 Previous EMA 1 0 1

24 0 1

( ) (. ) ( (. ))

($.

= ×+ ×−

=× )) ($ .+×=29 42 0 9. ) $ .28 87

Figure 11.12 compares the sensitivities of a 40-Day EMA to that of the 40-

Day SMA on a daily Chart of iShares Barclays 20+ Year Treasury Bond Fund. We

observe that the EMA reacts more rapidly to price changes than the SMA, with

respect to the same periodicity.

(5) Volume-Weighted Moving average (VWMa) A volume-weighted moving

average is weighted according to the volume that accompanies the typical price

for each period. The greater the volume at a particular price, the more the value

of the moving average will be biased toward that price. Typically, tick volume is

used. In our example, we shall use the period’s volume instead. It is calculated

by first multiplying each period’s typical price by its volume and then adding it

all up. This total is then divided by the total volume to get the volume-weighted

average price (VWAP). See Figure 11.13. Notice that higher volume at $5 drove

the volume-weighted average price up to $3.42, from the average price of $3.00.

The percentage contribution or influence that most recent price has on the

moving average is ($400/$4800) × 100 percent = 8.33 percent. This is much

figure  11.12 Comparing EMA and SMA Sensitivities on a Daily Chart of iShares

Barclays 20+ Year Treasury Bond Fund.

Courtesy of Stockcharts.com