Exponential Moving Average
With simple averages the calculation is, well, simple. The simplicity of the calculation can sometimes cause a bit of a flaw to the SMA. The flaw is due to spikes in the price of a security.
For example, if you were to calculate the 4 day SMA of stock XYZ where its closing prices were, $2.90, $2.95, $3.00 and $2.95 the SMA would work just fine and smooth the price out to $2.95. Great, that sounds and looks about right.
In comes trouble, in our second example stock XYZ has a huge news event on day 2. Its closing prices over this 4 day span are $2.90, $4.95, $3.25, $3.15. See the large spike on day 2? That would cause the 4 day SMAto average the price out to $3.56, which is a bit high.
The exponential moving average to the rescue! With the EMA the calculation is a bit more complex in that it weighs the different closing prices within the moving average range. The EMA gives more weight to prices near the end of the range and less to those prices in the beginning of the range. This gives more influence to the current market activities of the stock. Which as you know, what is happening now in the market is what is most important to pay attention to.