Types of Moving Average Formulas

in Day-trading

A moving average formula is a day trading tool used by day traders to assess the cost trend of securities. There are four types of moving average formula which are the simple moving average, exponential moving average, smoothed moving average and linear weighted moving average. A moving average formula is used in day trading to smooth out rising and falling motions of prices. The simple and exponential moving average are the 2 types most frequently utilized.

SMA or the simple moving average is considered to be the average or the mean of a group of data in a certain period. Calculating the simple moving average is done by summing up the costs of a particular security at a certain time frame perhaps a 10-15 hour period and dividing the sum by the amount of periods chosen. The name itself tells you that it makes use of simple arithmetic.

To show you a small sample:

10-hour period:

Time Period - 1st hr 2nd 3rd 4th 5th 6th 7th 8th 9th 10th hr

Price of Stocks - $3 $5 $8 $7 $10 $4.5 $8.43 $4.5 $3.75 $5

These variety of prices would produce distinct fluctuations if plotted on a chart. To smooth out these fluctuations as well as provide the day trader a proper picture of the possible future stock prices, he makes use of the simple moving average.

Simple moving average computation:

• $3 + $5 + $8 + $7 + $10 + $4.5 + $8.43 + $4.5 + $3.75 + $5 = $59.18 (sum)

• $59.18 is then divided by 10 (number of periods used) = $5.918 (SMA)

When a recent cost is being added in, the earliest cost is extracted and the basic process is repeated. We currently have here an SMA duration of 10 hours. As the time period used gets lengthier, the more it lags behind the cost.

In the simple moving average, the old and latest data are given the same weight. On another hand, EMA gives more weight to the recent data compared with the previously existing ones. It can give a day trader a far better day trading signal due to the emphasis it places on the most up-to-date day trading activities. The trouble with working with EMA is the higher probability of obtaining bogus purchasing signals. To attain balance, day traders make use of together EMA and SMA in day trading.

To learn more about the other pair of moving averages, visit a day trading blog. In a day trading blog, you will find that each has its own approach, benefits and drawbacks in day trading.

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John Smith has 18 articles online

You can learn more about the moving average formula from this blog.

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Types of Moving Average Formulas

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This article was published on 2012/03/19