Moving Average

There are many ways to find Moving averages, such as simple moving average, Exponential moving average, Weighted Moving Average etc.

Calculation of each base upon formula,

1. Simple Moving average       Simple moving average = Sum of N day’s close price / N

( N = Number of days)

2. Exponential moving average

EMA = Price(t) *factor (k) + EMA(y) * (1 – k)

t = today, y = yesterday, N = number of days in EMA, 

factor(k) = 2/(N+1)

Or

EMA = [ close – EMA (Previous day)] * Factor + EMA(Previous day)

3. Weighted moving average

WMA = (n * Pn) + (n +1) * P(n+1) + (n + 2) * P(n +2) + … 

n+ (n+1) + (n+2)+……….

Calculation of moving averages is done automatically by most trading and technical software.

SMA is useful for shorter timeframe, but it is not useful for higher timeframes, as it is calculated arithmetically by adding all close prices and divided by number of days.

Hence, use of EMA or WMA makes a sense. These are useful for all timeframes.

Key Points to Learn?

1) Crossover of Moving averages gives buy and sell signals. Sometimes these signals fail. then, How to understand true buy and true sell signals?

2) How Moving averages determine trend and trend reversals?

3) How Moving average values gives support and resistance values?

4) How to correlate Parameters with different time frames charts