Types of Moving Averages
Types of MovingAverages
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.