How To Calculate Moving Averages

What is Moving Average?

Moving Average is an Indicator which shows average moving of Prices over a period of time in a pre-determined time.

Main Moving Averages are 3 Types:

  1. Simple Moving Average(SMA)
  2. Weighted Moving Average(WMA)
  3. Exponential Moving Average(EMA)

Simple Moving Average: To get Simple Moving Average, take all the closing prices for the days or any time frame we want, add them and divide by the days.

To get 3 days or any time frame  Simple Moving Average;

Day             Price           SMA

Day 1       30.00                   

Day 2       35.00                   

Day 3       40.00       35.00 (30+35-40/3 = 105/3 = 35)

Day 4       33.00       36.00 (35+40-33/3 = 108/3 = 36)

Day 5       29.00       34.00 (40+33-29/3 = 102/3 = 34)

Weighted Moving Average: WMA calculation is bit different. Take all closing prices, multiply 1st day price with 1, 2nd day price with 2, 3rd day price with 3 and continues until how many days WMA we want and divide by 2 X Days.

To get 3 days or any time frame  Weighted Moving Average;

Day             Price           WMA

Day 1       30.00                   

Day 2       3500                    

Day 3       40.00       36.66 (30X1+35X2+40X3/2X3 = 30+70+120/6 = 220/6 = 36.66)

Day 4       33.00       35.66 (35X1+40X2+33X3/2X3 = 35+80+99/6 = 214/6 = 35.66)

Day 5       29.00       32.16 (40X1+33X2+29X3/2X3 = 40+66+87/6 = 193/6 = 32.16)

Exponential Moving Average: EMA calculation is little more complicated.

To get 3 days or any time frame  Exponential Moving Average;

Take the closing price of the 1st day as the EMA for the day.

The actual 3 days EMA can be had from 4th day onwards and so on.

EMA = (Closing Price-Previous EMA) X Factor + Previous EMA).

Factor = 2/n+1 (“n” is number days)

Here Factor = 2/3+1 = 2/4 = 0.5

Day             Price           EMA

Day 1         30.00       30.00                   

Day 2         35.00       32.50 (35-30) X 0.5 + 30 = 5 X 0.5 + 30 = 2.5 + 30 = 32.5  

Day 3         40.00       36.25 (40-32.5) X 0.5 + 32.5 =7. 5 X 0.5 + 32.5 = 3.75 + 32.5 = 36.25

Day 4         33.00       34.63 (33-36.25)X0.5+36.25 = -3.25 X 0.5+36.25 = -1.63 + 36.25 = 34.63

Day 5         29.00       31.82 (29-34.63)X0.5+34.63 = -5.63 X 0.5+34.63 = -2.82 + 34.63 = 31.82

MA Comparison

SMA gives much more weightage to Beginning Data or Far Data;

WMA gives much more weightage to Recent Data;  These are the main draw backs in SMA and WMA.

To rectify these two draw backs, EMA has been introduced.  It gives equal weightage to all Data.  Because, we have taken a Dynamic Fixed Factorial.

Out of those three Moving Averages, SMA and EMA are widely used.

Uses of Moving Averages:

We can use Moving Averages to:

  • Identify the Trends,
  • Determine Support and Resistance Levels,
  • Catch Entry and Exit Points.

We use 15 to 30 Moving Averages(Fast MA) for Short Term Trading,

We use 50 to 60 Moving Averages(Slow MA) for Medium Term Trading,

We use 100 to 400 Moving Averages(Slow MA) for Long Term Trading.

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