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Definition

Moving averages are the most basic form of line chart in technical analysis. They are more commonly used in conjunction with other indicators than as indicators in their own right. One of the major criticisms of moving average is that they assign the same weight to the most recent share price as to the oldest share price in the average. Technicians argue that older prices should be assigned less weight than the most recent prices. To achieve this they have developed a range of weighting mechanisms. Exponential weighting means that as you move forward to the most recent prices, they are accorded an exponentially greater weight in the moving average - and vice versa. The following example includes both 65-day exponential (black) and a simple (red) moving averages to enable you to see the differences:
<figure class="container-fluid"><img class="img-responsive" style="display: block; margin: 0 auto; max-width: 100%;" src="/onlinecourse/images/Exponential-Weighting.png" alt="exponential weighting" />
<figcaption style="text-align: center;">Exponential Weighting and Simple Moving Averages</figcaption>
</figure>
What you will notice is that the exponential moving average tends to follow the share's price more closely than the simple (i.e. unweighted). This means that the exponential will tend to give more signals earlier - which, of course, means that it will be more whip-lashed.

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