Nicholas)Bucheleres) October)31,)2010!

! Exponentially!Weighted!Moving!Average!Calculation!
!
)

Step!1:)Determine)Time/Price)Series) ) Step!2:)Calculate)Periodic)Returns) ) )

# Ri & x i = ln% ( Ri1 ' ) $

Natural'Log'of'(todays'returns'over'yesterdays'returns).''

) Step!3:)Average)Squared)Returns)

The'average'of'the'summation'of'squared'returns'over'period'm'returns'the'variance' of'price'movement,'or'the'simple'(non?weighted)'moving'average.'

1 m 2 Variance= = x n 1 )) m i=1
2

Now)we)have)the)average)of)the)squared)returns,)or)variance)(simple)moving) average).))In)order)to)exponentially)weight)this)average,)we)are)going)to)assign)a) decreasingly)weighted)tail)to)our)price)series.) ) We)are)going)to)use)the)lambda)coefficient)to)apply)a)proportionally)weighted) significance)to)(nR1))trailing)time)periods.))The)most)recent)periodic)return)receives) a)weight)of)(1R) ),)which)means)that)todays)squared)return)receives)a)weight)of)) (1Rx%))of)the)series.)Industry)convention)dictates)that) =94%,)so)today)receives)a) 6%)weighting,)yesterday)receives)a)weighting)of)(6%)*() =94%),)so)5.6%,)and)so) on.))Each)period)receives)94%)of)the)weighting)that)one)more)recent)does.)))) ) This)process)can)be)reduced)into)one)streamlined)formula:) )

) The'weighted'squared'returns'of'period'n=today'equals'(yesterdays'variance'times' the'lambda'coefficient)'plus'(1'minus'lambda)'times'yesterdays'squared'return.''' ) Note:' )+)(1R) ))=)1) )

n = n 1 + (1 ) x n 1 )