Moving average technical indicator

Moving average technical indicator

Moving Average Technical Indicator shows the mean instrument price value for a certain period of time. When one calculates the moving average, an average of one instrument price for this time period. As the price changes its moving average either increases or decreases.

There are four different types of moving averages: Simple (also known as arithmetic), exponential, and linear weighted smoothed. Moving averages can be calculated for any sequential data, including opening and closing prices, the highest and lowest prices, volume or any other indicators. It is often the case when double moving averages are used.

The only thing moving averages of different species diverge considerably from each other is when weight coefficients, which are awarded to recent data, are different. In case we are talking of simple moving average, all prices in the period in question, are equal in value. Exponential and Linear Weighted Moving Average attach more value for the latest prices.

The most common way of interpreting the price moving average is to compare its dynamics of price action. When the instrument price above its moving average, to buy signal appears, if the price falls below its moving average, what you have is a sell signal.

This trading system, which is based on moving average, is not designed to provide entry into the market right at its lowest point and exit at the top. It allows you to act in accordance with the following trend: to buy after prices reach bottom, and sell after prices peaked.

Moving averages, can also be applied to indicators. That is where the interpretation of the indicator moving averages is similar to the interpretation of price moving averages: if the indicator rises above its moving average, which means that after an upward movement indicator is likely to continue: if the indicator is below its average move, this means that it is likely to continue going down.

Here are the types of moving averages in the table:

*

Simple moving average (SMA)
*

Exponential moving average (EMA)
*

Smoothed moving average (SMMA)
*

Linear weighted moving average (LWMA)


Calculation:
Simple moving average (SMA)

Simply, in other words, arithmetic moving average is calculated by summing the prices of instrument closure over a certain number of a cycle (eg 12 hours). This value is then divided by the number of such periods.

SMA = SUM (close, N) / N


Where:
N - is the number of calculation periods.


Exponential moving average (EMA)

Exponentially smoothed moving average is calculated by adding the moving average of a certain part of the current closing price of the previous value. With exponentially smoothed moving average, for the latest prices more value. P-percent exponential moving average will look like this:

EMA = (close (i) * P) + (EMA (i-1) * (1-P))


Where:
Close (i) - cost of closing the current period;
EMA (i-1) - Exponentially Moving Average of closing the previous period;
P - the percentage of using the price value.


Smoothed moving average (SMMA)

The first value of this smoothed moving average is calculated as the simple moving average (SMA):

SUM1 = SUM (close, N)
SMMA1 = SUM1 / N


The second and succeeding moving averages are calculated by this formula:

PREVSUM = SMMA (i-1) * N
SMMA (i) = (PREVSUM-SMMA (i-1) + Close (i)) / N


Where:
SUM1 - is the total sum of closing prices for N periods;
PREVSUM - is smoothed sum of the previous bar;
SMMA1 - is smoothed moving average of the first time;
SMMA (i) - a smoothed moving average of the current bar (except the first);
Close (i) - is the current closing price;
N - is the smoothing period.


Linear weighted moving average (LWMA)

In the case of weighted moving average, the latest data are of greater value than more early data. Weighted moving average is calculated by multiplying each of the closing prices in the considered series, with a certain weight coefficient.

LWMA = SUM (Close (i) * i, n) SUM (i, N)


Where:
SUM (i, N) - the total amount of weight coefficients.