Different Types of Moving Averages
In today’s article we will discuss three different types of moving averages used in technical analysis. As previously discussed, a moving average is an indicator that shows the average value of a security’s price over a set period of time. There are many different types of moving averages and they each are calculated differently, but they all have a similar smoothing effect on the data. Due to this, any unexpected price changes are removed to show the overall direction more clearly. In today’s article we will discuss the simple moving average (SMA), the exponential moving average (EMA) and the weighted moving average (WMA).

Simple Moving Average (SMA)
Also known as the arithmetic moving average the simple moving average is the most common method used to calculate the moving average of prices. It takes the sum of all past moving prices over a specific time period and divides the result by the number of prices used in the calculation. Many investors feel that this type of average has its limits considering each point in the data series has the same impact on the result in spite of where it occurs in the sequence. Additionally, investors criticize this average because they think that the most recent data is more important and should have a higher weighting. This is why there are different types of moving averages available to investors.

Exponential Moving Average (EMA)
Contrary to the simple moving average, this moving average puts more weight towards recent data and less weight towards past data and as a result is an indicator that is more often used. The exponential moving average is calculated by applying a percentage of today’s closing price to yesterday’s moving average value. When using this indicator it is important to keep in mind that it is more responsive to new information and it is for this reason that more investors choose to utilize this average among all the other different types of moving averages.

Weighted Moving Average (WMA)
This average is calculated by multiplying each of the previous day’s data by weight. Therefore it is designed to put more weight on recent data and less weight on past data. In other words, it is simply a moving average that is weighted so that more recent values are more heavily weighted than values further in the past. Evidence also indicates that the use of this type of moving average gives better volatility estimates than the simple moving average.

The first step to utilizing moving averages as your technical analysis indicator of choice is to understand the different types of moving averages that are available. Combining moving averages with Japanese Candlesticks is a great way to increase probability of profitable trades in the future. This site provides weekly entries that identify the different candlestick chart patterns utilized when practicing candlestick analysis. You can learn about how these patterns indicate what is happening in the markets. Patterns such as the dark cloud cover, the inverted hammer candlestick, the candlestick piercing pattern, and the bullish harami candle. By combining these methods, you are on your way to successful investing!

Continue your technical analysis education and read now about the moving average crossover.