Moving Average MA
Moving Average Indicator Purpose
Moving Average is a technical analysis indicator that demonstrates average price of a security's price over a given period of time.
There are five popular types of MA:
- simple (also known as a SMA
- exponential (EMA),
- variable, and
MA can be calculated on any data series including a security's open (high, low, close, volume) or another indicator. MA of another moving average is also common. BUY signal is produced when the security's price rises above its MA. SELL signal is happened when the security's price falls below its MA.
MA is also used to determine Forex trend direction and strength. SMA concern equals weight to the prices. Exponential and weighted averages apply more weight to recent prices. Triangular averages apply more weight to prices in the middle of the time period. And variable moving averages change the weighting based on the volatility of prices.
Moving Average Indicator Usage
Normally MA analysis contains the following principles:
- Direction of moving average curve reflects prevailing trend over a period;
- Low-period averaging may give more false signals, while large-period averaging tend to be lagging;
- To increase (decrease) sensitivity of the curve one should decrease (increase) the period of averaging;
- Average curves are more useful in trending environment.
Comparing moving average with price movements:
- Strong buy (sell) signal arise if price crosses from below (from above) its rising (falling) moving average curve;
- Weak buy (sell) signals arise if price crosses from below (from above) its falling (rising) moving average curve.
Comparing moving average curves of different periods:
- A rising (falling) lower-period curve crossing from below (above) another rising (falling) longer period curve gives a strong buy (sell) signal;
- A rising (falling) lower-period curve crossing from below (above) another falling (rising) longer-period curve gives a weak buy (sell) signal.
Moving Average Indicator Calculation
SMA = Sum (Close (i), N) / N,
Close (i) – current close price;
N – period of averaging.
EMA(t) = EMA(t-1) + (K x [Close(t) – EMA(t-1)]),
t – current period;
K = 2 / (N + 1), N – period of averaging.