The moving average of a stock
index is the average level of the index over a given interval of time. For
example, a 52-week moving average tracks the average index value over the most
recent 52 weeks. Each week, the moving average is re-computed by dropping the
oldest observation and adding the latest. After a period in which prices have
generally been falling, the moving average will be above the current price
(because the moving average “average in” the older and higher prices). When
prices have been rising, the moving average will be below the current price.
When the market price breaks through the moving average line from below, it is
taken as a bullish signal because it signals a shift from a falling trend (with
prices below the moving average) to a rising trend (with prices above the moving
average). Conversely, when prices fall below the moving average, it’s considered
time to sell. There is some variation in the length of the moving average
considered most predictive of market movements. Two popular measures are 200-day
and 52-week moving averages. The longer the time span, the less sensitive the
moving average will be to daily price changes. Moving averages are used to
emphasize the direction of a trend and smooth out price and volume fluctuations
(or "noise") that can confuse interpretation.
a) Simple Moving Average:A Simple Moving
Average is an average of data calculated over a period of time. The moving
average is the most popular price indicator used in technical analyses, and can
be used with any price (e.g. Hi, Low, Open and Close) or it can be applied to
other indicators. A moving average smoothes a data series, which is very
important in a volatile market. Also, trends are easier to spot using a moving
average. An example is illustrated graphically as follows:
b) Exponential Moving Average (EMA):An
Exponential Moving Average is an average of data calculated over a period of
time where the most recent days have more weight. The exponential moving
average can be used with any price: Hi, Low, Open and Close or it could be
applied to other indicators. An Exponential Moving average smoothes a data
series, which is very important in a volatile market. In order to reduce the
lag in simple moving averages, technicians often use exponential moving averages
(also called exponentially weighted moving averages). An example is illustrated
graphically as follows:
c) Triangular Moving Average:A Triangular
Moving Average is an average of data calculated over a period of time where the
majority of the weight is placed on the middle portion of the price series. They
are actually double-smoothed simple moving averages. The Triangular Moving
Average can be used with any price (Hi, Low, Open, Close) or it can be applied
to other indicators. The Triangular Moving Average smoothes a data series,
which is very important in a volatile market.
d) Weighted Moving Average:A Weighted Moving
Average is an average of data calculated over a period of time, where greater
weight is attached to the most recent data.The Weighted Moving Average can be
used with any price (Hi, Low, Open, Close) or it can be applied to other
indicators. The Weighted Moving Average smoothes a data series, which is
important in a volatile market. Weighting is calculated from a sum of days.
A weighted moving average is calculated by multiplying each
of the previous day's data by a weight. The weight is based on the number of
days in the moving average. For example for 5-day weighted moving average, the
weight on the first day is 1.0 while the value on the most recent day is 5.0.
This gives five times more weight to today's price than the price five days ago.
Moving averages can be effective tools to identify and
confirm trend, identify support and resistance levels, and develop trading
systems. The most popular method of interpreting a moving average is to compare
the relationship between moving averages of the security's price with the
security's price itself. A buy signal is generated when the security's price
rises above its moving average and a sell signal is generated when the
security's price falls below its moving average.
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