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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.

To calculate a simple moving average, add the closing price of the security for the number of time periods (e.g. 10 days) and then dividing this total by the number of time periods, giving the average price of the security over the time period. To calculate an exponential moving average you need a starting figure (typically yesterday's close) and the number of periods. The next day's number is then calculated as:- (2/(number of time periods +1) * (today's close - yesterdays EMA)) + yesterdays EMA. The other kinds of MA are uncommon, and outside the scope of this article. Interestingly enough, recent research seems to indicate that simple moving averages perform best of all.

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