Moving Averages Technical Indicator
Posted by Edward Dy on July 5th, 2008
Photo Credit: adamjinj
One the most fundamental technical analysis tools is the moving average. There are a couple of most popular kinds of moving average: the simple moving average; and the exponential moving average. We can solve for the SMA by averaging market prices within a certain time period. We can take as an example, the 20-day moving average that would, during the first 20 market days, average the levels of prices.
On the next day, the SMA would now have the 21st day of the market, excluding the first day. All SMA values are drawn on a chart, and can be a pretty good indicator of the overall price behavior. The more the SMA take periods into account, the less market fluctuations behavior will be reflected by the SMA, hence the smoother will be the data.
Another type of moving average, the exponential moving average or EMA is more complicated. However, it can be calculated by taking the difference between the current price and the former EMA. This value then is multiplied by a set percentage. This set percentage is usually dependent on the number of periods that were considered. The number that results is added to the earlier value of the EMA. Unlike the SMA, the EMA will not remove previous price levels, and will continue to be included when calculating, and for that reason is considered a bit more responsive at reflecting the price’s minor fluctuations.
All in all Moving averages can be an effective tool in getting the big picture regarding a particular asset’s price behavior. They can also be utilized as variables for a number of fairly complicated technical analysis tools and charts.
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