Sunday, November 24, 2013
Types of Moving Averages
There are a large number of moving averages available for traders. Some of them are:
The simple moving average is the most basic of these tools. It simply sums up the cloaisng prices over a specified time, and divides them by the duration of the period, reaching at the value of the indicator. No weighting is used, and no smoothing factor is applied.
The exponential moving average is one of a number of different moving average types that gives greater value to the most recent prices. As its name implies, the weighting is done exponentially. In other words, as we move to the left on the chart (towards past values), the weighting that they receive in the computation of the MA decreases rapidly (faster than it would be in a linear progression), and the most recent prices are far more significant, as a result, in determining the value of the indicator.
The smoothed moving average is similar to EMA, except that it takes all available data into account. The earliest price values are never discarded, but receive a lower weighting, and possess a smaller role in determining the value of the indicator. As its name hints, the smoothed moving average is mostly used to smoothen the price action, removing short-term volatility, allowing us a better understanding of the long term momentum of the market.
This moving average is similar to the MA, except that the weighting factors are linear, not exponential. For example, the price of the earliest period (n) is multiplied with 1, the following, more recent period (n-1) is multiplied by a factor of, 2, and the next one is multiplied by 3, and so on, until we reach the present timeframe. In this context, the most recent prices receive greater emphasis, and the latest fluctuations, rises or falls are depicted with greater clarity, aiding trade decisions.