New ETF Book by Larry Connors - Click here to read more
There are several types of moving averages. The most basic is the simple moving average (SMA), which is the sum of closing prices over a particular period divided by the number of days in that period.
For example, a five-day simple moving average would be the sum of the closing prices of the five most recent trading days, divided by five; a 20-day moving average would be the sum of the 20 most recent closing prices divided by 20, and so on. Each day the most recent closing price is added to the equation and the most distant day is dropped off.
A weighted moving average (WMA), the most simple of which is referred to as a linearly weighted moving average, multiplies closing prices by a weighting factor that emphasizes recent price action. The oldest price in the calculation is multiplied by 1, the second oldest by 2, the third oldest by 3, etc.
For example, a standard five-day weighted moving average would multiply the closing price of the fifth most recent trading day (five trading days ago) by one, the fourth most recent trading day by two, the third most recent trading day by three, the second most recent trading day by four, and the most recent trading day by five. These products would be summed and then divided by the sum of the weighting factors (in this case, 1 + 2 + 3 + 4 + 5 = 15) to derive the linearly weighted moving average value for the current day. Other weighting schemes can be used to increase or decrease the emphasis of more recent prices.
An exponential moving average (EMA) is actually a specific type of weighted moving average. It uses a constant (a smoothing factor) between 0 and 1 in the following manner: the current closing price (C) multiplied by the smoothing constant (S) added to the product of the previous day's exponential moving average value (PEMA) and 1 minus the smoothing factor, or:
While the description and formula seems somewhat confusing, the approach is actually simpler to calculate than other moving averages because all you need is today's closing price and yesterday's EMA value.
Final notes: The preceding descriptions use daily closing prices. Moving averages can, of course, be constructed on intra-day, weekly or monthly time frames, and substituting the open, low, high or average price of a bar for the closing price.
Over the long run, most studies have shown the practical differences of the these three moving averages types to be negligible. Using one over the other can only be considered a matter of personal preference. In fact, some traders dislike standard weighted and exponential moving averages because they feel these calculations distort recent price action.
One distinct type of moving average is the Adaptive Moving Average (AMA), which dynamically adjusts the number of days in the moving average calculation to current market volatility: In high volatility-periods the number of days would increase (making the average less sensitive and less prone to whipsaws), and in low-volatility periods the number of days would decrease (making the average more sensitive to smaller price swings).
Articles related to Moving Average
About TradingMarkets | Contact | Advertise | Careers | Link to Us | Site Map | Help | Terms & Conditions | Privacy Policy | Return Policy | Testimonials | Feedback
The Connors Group, Inc. ("Company") is not an investment advisory service, nor a registered investment advisor or broker-dealer and does not purport to tell or suggest which securities or currencies customers should buy or sell for themselves. The analysts and employees or affiliates of Company may hold positions in the stocks, currencies or industries discussed here. You understand and acknowledge that there is a very high degree of risk involved in trading securities and/or currencies. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. Factual statements on the Company's website, or in its publications, are made as of the date stated and are subject to change without notice.
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results of any individual trader or trading system published by Company are not indicative of future returns by that trader or system, and are not indicative of future returns which be realized by you. In addition, the indicators, strategies, columns, articles and all other features of Company's products (collectively, the "Information") are provided for informational and educational purposes only and should not be construed as investment advice. Examples presented on Company's website are for educational purposes only. Such set-ups are not solicitations of any order to buy or sell. Accordingly, you should not rely solely on the Information in making any investment. Rather, you should use the Information only as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment.
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING AND MAY NOT BE IMPACTED BY BROKERAGE AND OTHER SLIPPAGE FEES. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.
The Connors Group, Inc.
10 Exchange Place, Suite 1800
Jersey City, NJ 07302
© Copyright 2009 The Connors Group, Inc.
