Moving Averages

Moving Averages

Moving averages provide an objective measure of trend direction by smoothing the price data. Normally calculated using closing prices, as closing price are assumed to be the most reliable one and give the clear picture of the time frame for which the moving averages have been calculated. Moving averages can be calculated for any time frame like 30 minutes, 60 minutes, daily , weekly , monthly or yearly. Moving averages are of three different types based on their calculation methodology as:

1.    The  Simple Moving Average 

2.    The  Exponential Moving Average 

3.    The  Weighted Moving Average

4.  The Variable Moving Average

All the above moving averages are same they give different signals due to the method of their computation but their significance remains the same.

The Role of Moving Averages is very fundamental as follows:

—  It smoothens the underlying data, as its calculation is based on averages.

—  It tells us about the current trend or gives the evidence that trend has reversed.

—  Its violation is really critical as it indicates the possibility of trend reversal.

—  It provides the support and resistance points fro the price data.

 The moving averages are very old and popular tool in technical analysis and yet the most basic. Let us understand the different Moving averages and their respective methodologies.

Type of MA	Description	Methods Used
Simple (This is the most commonly used MA)	Use of multiple MAs can provide good signals Useful periods ·         Short term 10-30 day ·         Mid term 30-100-day ·         Long term 100-200+day There is no perfect time span	·         Crossover of short term through long term ·         Convergence/ Divergence ·         Crossover of MA by price
Linearly Weighted	With this MA, data is weighted in favour of most recent observations. Has the ability to turn or reverse more quickly than simple MA.	Warning of trend reversal given by change in direction of the average rather than crossover.
Exponential (EMA)	An exponential (or exponentially weighted) moving average is calculated by applying a percentage of today's closing price to yesterday's moving average value. Exponential moving averages place more weight on recent prices.	·         Crossover of short term through long term ·         Convergence/ Divergence ·         Crossover of MA by price
Variable	An automatically adjusting exponential moving average based on the volatility of the data.	The more volatile the data, the greater the weight given to the current data and the more smoothing used in the moving average calculation.