Exponential Moving Average (EMA)
An exponential moving average (EMA) is a moving average that gives greater weight to the most recent prices, so it responds faster to new price changes than a simple average.
The EMA applies a smoothing factor, usually 2 divided by (number of periods + 1). Each new EMA value equals today's price times that factor, plus the previous EMA times (1 minus the factor). Older prices never fully drop out, but their influence fades exponentially.
For a 20-day EMA, the factor is 2/21, or about 0.095, so the latest close accounts for roughly 9.5% of the new value. Example: if yesterday's 20-day EMA was $50 and today's close is $54, the new EMA is about $50 + 0.095 x ($54 - $50) = $50.38.
Short-term traders often prefer EMAs, such as the 9-, 12-, 20- or 26-day, because they turn sooner when a trend changes. The MACD indicator is built from the difference between a 12-day and a 26-day EMA.
The trade-off is sensitivity: faster reactions mean more false signals in choppy, sideways markets than a simple moving average of the same length would produce.