Simple(SMA), Exponential(EMA), and Weighted(WMA) Moving Averages on live DataSets to Observe trend of financial market


Medium navigation smoothes pricing data to create the following index. They don’t predict direction of price, but instead define the running direction of index, even if they are lagging behind due to past prices. Apart from this, moving scale helps smooth price-action and sound filtering. They also build blocks to build a lot of other technical and compact indicators, like Bollinger Bands, McClellan Oscillator, MACD. Two most frequently used moving averages indicators are SMA(Simple Moving Average) and EMA(Exponential Moving Average). These all moving averages might be used to grab the trend direction or define possible resistance and support levels.

Analysis of SMA

SMA is made by calculating the price as an average of a security on a specific period of time. Maximum moving averages based on the closing price; as an example, SMA of 5-Days is the sum of five days closing value divided by 5. By its name imply, moving average calculation is an average it moves per day basis. The old data would be deleted when new data will be available, moving along the average time scale. In the example shows below that the 5-days moving average is developing for last three days.

Daily Closing Prices: 26,27,28,29,30,31,32

First day of 5-day SMA: (26 + 27 + 28 + 29 + 30) / 5 = 28

Second day of 5-day SMA: (27 + 28 + 29 + 30 + 31) / 5 = 29

Third day of 5-day SMA: (28 + 29 + 30 + 31 + 32) / 5 = 30

The 1st day of moving average only covers for the last 5-days. The 2nd day of moving average falls the first day data-point (26) and adds a new data-point (31). The 3rd day moving average calculating by dropping the 1st data-point (27) of 2nd day and adding a new data-point (32). This example above signifies, prices slowly increase from 26 to 32 in a total of 7 days. Note that moving average again increases from 28 to 30 in the 3-day calculation period. Again, note each of moving average price is just only below the final price. That signifies, a moving average of the 1st day is equal to 28 and last price 30. In the last four days, the prices were low and this lagged the moving average.

Analysis of EMA

The exponential moving average (EMA), it’s an average weighted prices of recent period. It uses a rapidly non increasing weight from previous value / period. Parallelly, the formula results more importance to recent prices than its previous prices.

As an example, four-term EMA prices are 1.6554, 1.6555, 1.6558 and 1.6560. The latest value will be the most current value and returns current EMA price of 1.6558.

EMA = (2 / n+1) × (Close – Previous EMA) + Previous EMA

EMA adapts for changing the price more rapidly than SMA. As an example, when a price opposites its direction, the value of EMA will also reverse the direction faster than the value of SMA. This happens because of the formula of EMA overestimates current prices and gives lesser weighted prices from the previous.

Like SMA, all the chart pattern calculates all the EMA value for you. Choose EMA from all the Indicators list on the chart pattern and apply results to your own chart. Go into the Settings and modify no of periods of the indicator will count, such as 20, 50, or 105.

Initial SMA: 10-period sum / 10 Multiplier: (2 / (Time periods + 1) ) = (2 / (10 + 1) ) = 0.1818 (18.18%)EMA: {Close – EMA(previous day)} x multiplier + EMA(previous day).

Analysis of WMA

Weighted moving average(WMA) is giving us an idea of weighted average for a previous prices, whereas the weight decreases with compare to each recent prices. It works just like EMA, but we can calculate WMA differently.

WMA may have different weight depending on the no of periods which is used in those calculations. If we want to analyze a WMA of four set of different prices, the most current weighting can be four(4) to ten(10). The earlier period may weigh three(3) to ten(10). The 3rd period may carry a weight of two(2) to ten(10), and continued.

For example, a weight counts four(4) to ten(10) means that we have ten(10) recent periods & all their prices. We choose the four(4) near recent values. This is 40% value of weighted moving averages(WMA). So the price of four(4) periods ago is only 10% of WMA value.

In this example, assume the prices are 94, 92, and 95 with the near recent price. You will calculate it as

[93 × (4/10)] + [94 × (3/10)] + [92 × (2/10)] + [95 × (1/10)] = 37.2 + 28.2 + 18.4 + 9.5 = 93.3

Help and Interpretation of Moving Average

We can utilize moving averages always for both trading and analysis of all signals. To analyze, all moving averages will help to highlight the market trend. If the price will be above the moving average, which indicates that price could be ready for trading above average during the period which already analyzed.

This will be the confirmation for uptrend. When its price stays below of the moving average, which indicates that price will be trading below average for the period of analysis. This indicates the confirmation of downtrend.

If the price exceeds of moving average of that stock, it shows that the price can becoming stronger than before because the very recent price is now higher than its average. When the price falls below of moving average, which indicates that price may be weakening earlier than before.

A short-term and a long-term moving average — As an example, 10 and 50 days — can be combined into a chart parallelly. When the 10-day moving average is crossed above the 50-day moving average, which indicates that short-term price is moving upward direction. When the 10-day moving average falls below the 50-day moving average, it indicates that in short-term price is moving downward direction.

Moving averages might be included with other types of indicators to provide accurate trade signals. An EMA may provide a buy signal in combination with a Keltner channel, an indicator carrying with a low, average, and high price can creates and draw “channel” on the chart. One strategy might include for buying near an EMA only when its trend picks up, and its price must be pulled back from above the Keltner Channel.

Some moving average is might not traditionally better than other types; it calculates the average value of price in different manner. Depending on all these strategies you are using, one type of particular moving average might work so well than other types. Trying various types of moving average as a whole to see which one gives you the best fitted results.

We can find that, for a particular market, we need to manage your settings and tuned slightly. For example, a 50-day SMA may give good signals on a particular stock, but it might not work better on another. For a 10-day EMA can help differentiate the trend to one of futures contract of a particular stock, but not in another. All moving averages must and nothing but tools and it will depend to the trader to interpret them as none of the indicators work well at all times or in all market conditions.

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