What is Exponential smoothing?

Exponential smoothing uses similar logic to the moving average, but this time, different decreasing weight is assigned to each observation.

• We can also say, less importance is given to the observations as we move further from the present.

• Mathematically, exponential smoothing is expressed as:

• Here, alpha is the smoothing factor that takes values between 0 to 1. It determines how fast the weight will decrease for the previous observations.

• From the above plot, the dark blue line represents the exponential smoothing of the time series using a smoothing factor of 0.3, and the orange line uses a smoothing factor of 0.05. As we can see, the smaller the smoothing factor, the smoother the time series will be.

• Because as the smoothing factor approaches 0, we approach the moving average model.