Moving Average

published by fxtech.info

General information

Moving Average or (MA) is one of the simplest, easiest and effective trading tool. It shows the average value of data in a fixed time period. Main purpose of the Moving Average is to be a self adapting trend line and also to be main support or resistance level. Most common periods used for calculating Moving Averages are: 5, 10, 20, 50, 100 and 200. The shorter the period is, the higher the probability of false signals is.

There are few types of moving averages:

-Simple Moving Average (SMA);

- Exponential Moving Average (EMA);

- Smoothed Moving Average (SMMA);

- Linear Weighted Moving Average (LWMA)

The standard Moving Averages using in technical analysis are:
- Short-term MAs are: MA(5), MA(10), MA(14) and MA(20)
- Mid-term MA is MA(50);
- Long-term MAs are: MA(100), MA(200), MA(400) and MA(600)

Simple Moving Average (SMA)

This is the simlest from all moving averages. It shows the average value of data in a fixed time period.The number of values or data points used in the calculation is known as the "period". And when you connect each period's MA value, you create a moving average line.

Formula for calculating SMA :

Let’s look at a 9 days simple MA. For this example we will use close price for the last 9 days (you can experiment and calculate this MA with open, high, low or with any data you want). So lets say the last 9 days closing prices were:

SMA example

SMA value for the last day will be:

SMA example 2

On the next day (the 10-th day) the close price is 1.4740 so we will have this:

SMA example 3

And so on.

When you connect each day's SMA values, you create a simple moving average line.

From this example we understood that the simple moving average follows the price but because of its nature the SMA will lag (delay) a little bit. SMA is great when we analyze long term charts Daily, Weekly and Monthly but for the short and midterm charts EMA is more suitable.

Exponential Moving Average

The difference between SMA and EMA is that the Exponential Moving Average gives more weight to more recent prices in an attempt to make it more adequate to current market conditions. EMA responds to changes faster than a SMA and also old data slowly fades away. That is why Exponential Moving Average is a better trend following tool than Simple Moving Average.

Formula for calculating EMA :

When we start to calculate EMA we do not have EMA(yesterday).

So instead of EMA(yesterday) only for the first point we will use SMA(simple moving average). For all remaining points in calculation we will use EMA(yesterday).

Smoothed Moving Average

A Smoothed Moving Average is an Exponential Moving Average, only with a longer period applied. The Smoothed Moving Average gives the recent prices an equal weighting to the historic ones. In a Smoothed Moving Average, rather than subtracting the oldest value the previous smoothed average value is subtracted.

Formula for calculating EMA :

When we start calculating SMMA, first point will be calculated like Simple Moving Average (SMA)

SMMA Formula 1

and for all other points we must use this formula:

SMMA Formula 2

Linear Weight Moving Average

A Linear Weighted Moving Average (LWMA) is a modified Exponential Moving Average. The weight in LWMA is in linear progression (e.g.: 1, 2, 3…). Weight for the first period is 1, for the second - 2 and so on. LWMA assigns more weight to the more recent prices Generally, this is better for longer term moving averages because it allocates more weight to current prices at the expense of older prices. Like EMA, LWMA was also created to overcome the lagging associated with simple moving average. While weighting is not as significant for a 5 day moving average, there is a substantial difference in a longer period, such as a 50 day moving average. .

Formula for calculating LWMA :