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Moving Average - MA

The Moving Average technical indicator shows an average price value for a certain period of time. Calculating the moving average, one makes price averaging 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 referred to as arithmetic, exponential, smoothed and linear weighted. With the help of moving averages any sequential data set may be calculated, including opening and closing prices, highs and lows, trade volume or any other indicators. Double moving averages are also used often.

Weight coefficient of latest data is the only thing that distinguishes moving averages of different types. In case of simple moving average, all prices in the given time period are equal in value. Exponential and linear weighted moving averages attach more value to the latest prices.

The most common way to interprete the price moving average is to compare its dynamics to the price action. When an asset's price rises above its moving average, a buy signal appears; if the price falls below its moving average, what we have is a sell signal.

This kind of trading system based on the moving average is not designed to provide market entries right in its lowest point and exits right on the peak. It allows a trader to act according to the following trend: to buy soon after the prices reach the bottom, and to sell soon after the prices have reached their peak.

Moving averages may also be applied to indicators. That is where the interpretation of indicator moving averages is similar to the interpretation of price moving averages: if the indicator rises above its moving average, that means that the ascending indicator movement is likely to continue. If the indicator falls below its moving average, this means that it is likely to continue going downward.

Here are the types of moving averages on the chart:

Simple Moving Average (SMA)

Exponential Moving Average (EMA)

Smoothed Moving Average (SMMA)

Linear Weighted Moving Average (LWMA)

Calculation:

Simple Moving Average (SMA)

Simple or arithmetical moving average is calculated by summing up the prices of instrument closure over a certain number of single periods (for instance, 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 share of the current closing price to the previous value. With exponentially smoothed moving averages, the latest prices are of more value. P-percent exponential moving average will look like:

EMA = (CLOSE(i)*P)+(EMA(i-1)*(100-P))

Where:

CLOSE(i) - the price of the current period closure;

EMA(i-1) - Exponentially Moving Average of the previous period closure;

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 according to this formula:

SMMA(i) = (SUM1-SMMA1+CLOSE(i))/N

Where:

SUM1 - is the total sum of closing prices for N periods;

SMMA1 - is the smoothed moving average of the first bar;

SMMA(i) - is the smoothed moving average of the current bar (except for the first one);

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 is of more value than more early data. Weighted moving average is calculated by multiplying each one of the closing prices within the considered series, by a certain weight coefficient.

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

Where:

SUM(i, N) - is the total sum of weight coefficients.

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