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A Moving Average
is the average value of a stock's price over a set time period.
The 5 most popular types of moving average (MA) are:- simple (SMA),
exponential (EMA), triangular (TMA), variable (VMA), and weighted
(WMA). The most common and popular form (and easiest to calculate)
is the simple moving average, followed by the exponential moving
average. The difference between the 5 types is purely down to how
much 'weight' the average applies to recent data, compared to older
data. An SMA, for example, applies equal weight to all the prices
in the series, whereas an EMA applies more weight to the recent
prices. TMAs apply more weight to prices in the middle of the series,
while VMAs modify the weighting based on price volatility. In almost
all cases, a buy signal is generated when the security's price rises
above the moving average and a sell signal is generated when the
security's price falls below the moving average. This is generally
supposed to keep you in line with the current trend, although as
'lagging' indicators, moving averages may, depending on their period,
'whipsaw' you in and out at the worst possible time. The timeperiods
used to generate moving averages are usually either 200 day, 50
day, 20 day, 10 day or 5 day. Other indicators can also be converted
into moving averages, and the same principles tend to apply - when
the indicator rises above the MA of the indicator, it usually means
the upward trend will continue and vice versa. MAs are often used
in this way to 'smooth' erratic or highly volatile indicators, such
as stochastics. Day trading methods using moving averages are common,
often using short time periods to try and catch reversals and turns
in th every short term trend. |
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