Indicators Made Easy –Moving Averages Part 1

hi,
I will try to cover some of the most commonly used technical indicators, their usage and usefulness.I am starting with moving averages


Types of Moving Averages
There are different types of moving averages i.e.Simple, Exponential, Weighted and Triangular moving averages.Two of the most commonly used ones are simple (SMA) and exponential (EMA) which we will discuss here.MA (moving averages) are probably one of the simplest technical trading indicators which are used by most of the traders. The reason it is called a ‘moving average’ and not simply an average is because as we get new data/price the oldest data gets ignored from the calculation.

Purpose of Moving Averages

They are used to smooth out the noise (variation in data) ,and to give a general sense of trend in the underlying data which is being analyzed .Traders often use MA to find support and resistance levels at popular moving averages like 3,13,21,34,55,100,200.Moving averages also forms the basis for various cross over strategies

Simple moving Average (SMA)

A SMA is calculated by adding all the data over a specified number of periods and dividing it by number of periods

For calculation of SMA, you can go to this link and download the calculator.

Observe how the old data gets removed from the average as we get new data.

Exponential moving average (EMA)

Moving averages were criticized for being lagging in nature (they follow the price). In order to reduce this lag EMA got popular over a period of time.EMA reduces the lag by applying more weight to the recent data relative to older data.

Following is the formula to calculate the EMA

EMA (current) = ((Price (current) – EMA (previous)) x Multiplier) + EMA (previous)
Multiplier is calculated as follows

Multiplier =2 / (time period + 1)

For calculation of EMA, you can go to this link and download the calculator.

That’s all about it for the time being. I will cover trading strategies and other aspects of of moving averages in the next part.