Introduction
Moving averages are one of the most popular and easy to use
tools available to the technical analyst. They smooth a data series and make it
easier to spot trends, something that is especially helpful in volatile
markets. They also form the building blocks for many other technical indicators
and overlays.
A simple moving average is formed by computing the average
(mean) price of a security over a specified number of periods. While it is
possible to create moving averages from the Open, the High, and the Low data
points, most moving averages are created using the closing price. For example:
a 5-day simple moving average is calculated by adding the closing prices for
the last 5 days and dividing the total by 5.
In order to reduce the lag in simple moving averages,
technicians often use exponential moving averages (also called exponentially
weighted moving averages). EMA's reduce the lag by applying more weight to
recent prices relative to older prices. The weighting applied to the most
recent price depends on the specified period of the moving average. The shorter
the EMA's period, the more weight that will be applied to the most recent
price. For example: a 10-period exponential moving average weighs the most
recent price 18.18% while a 20-period EMA weighs the most recent price 9.52%.
As we'll see, the calculating and EMA is much harder than calculating an SMA.
The important thing to remember is that the exponential moving average puts
more weight on recent prices. As such, it will react quicker to recent price
changes than a simple moving average. Here's the calculation formula.
Exponential Moving Averages can be specified in two ways -
as a percent-based EMA or as a period-based EMA. A percent-based EMA has a
percentage as it's single parameter while a period-based EMA has a parameter
that represents the duration of the EMA.
There are many uses for moving averages, but three basic
uses stand out:
§ Trend identification/confirmation
§ Support and Resistance level
identification/confirmation
§ Trading Systems
About Money99
Parag Patil is a technical analyst and trading system designer with stock excel programmer. I hope the articles and live chart of nse future and mcx on this Website will be as helpful and profitable to you . I try to update and post new articles tips everyday. My motto is to encourage the traders, so that they should able to understand the technique views behind the moment of stocks. I have deeply analyzed with many technical indicator with parameter and added to my amibroker afl. And even taken backtest report which is never being implemented. Any of the analyst expect me. Seeing all this you may understand that my views is more technical than commercial. If you are profited by my views I fill happy.
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