Moving Average is probably one of the most frequently used indicators in technical analysis. This is a statistical indicator which indicates the average movement of the price of the stock for a specified period. This can be calculated for any time series. Generally this will be used to indicate the overall movement of the stock price for the specified time frame range and thus smoothes out the short term variations and fluctuations.
Simple Moving Average (SMA)
The Simple Moving Average (SMA) is one of the simplest indicators to calculate. It gives the average price of stock over a specified period of time. Generally Moving Averages are calculated for the closing prices of the stocks at the end of the day. But you may also calculate for the High, Low, Close and even on the traded Volumes of the stock.
For example, the 9 period SMA gives the average closing price of the stock for the past 9 days. It is calculated as follows:
If P1 represents the price on day 1; P2 represents the price on day 2 and so on, then SMA for period n is calculated as follows:
SMA (for period n) = ( P1 + P2 + P3 + ...... + Pn ) / n
So for example, if the close prices of a stock for 4 consecutive days are as follows: 120, 121, 122 and 123.
Then the SMA (for period 4) = (120 + 121 + 122 +123) / 4
So SMA (for period 4) becomes 486/4 = 121.5
Exponential Moving Average (EMA)
Exponential Moving Average (EMA) statistically applies exponentially decreasing weighting factor to the data. Thus EMA results in providing more importance to the recent variations in the data. So EMA reacts sharply to the recent data when compared to the SMA.
EMA for the Close price of a security is calculated as follows:
EMAc = (ClosePrice x Factor) + ( EMAp x (1-Factor) )
where:
EMAc = Current EMA
EMAp = Previous EMA
ClosePrice = Current Closing Price
Factor = 2 / (n+1) , where n is the period for which EMA is calculated |
