Moving Average

Moving average shows the mean (central average) instrument price value over a specific period of time and is used in technical analysis to plot a graph together with instrument’s prices.

The types of moving averages are the Simple (also referred to as Arithmetic), the Exponential, the Smoothed and the Linear Weighted.


Red line indicates Moving Average indicator
Calculation

Simple Moving Average (SMA) is calculated as the total of the price of instrument closure over a certain number of a single period (CLOSE, N) divided by the number of a period (N).

SMA = SUM (CLOSE, N)/ N


Exponential Moving Average (EMA) is calculated by adding moving average of a particular instrument of the current closing price (CLOSE (i)) to the previous value (i- 1).

EMA = (CLOSE (i)*P) + (EMA (i-1)*(1-P))

P = percentage of using the price value


Smoothed Moving Average (SMMA):

SUM1 = SUM (CLOSE, N) The total sum of closing prices
SMMA1 = SUM1/N The smoothed moving average of the first bar
PREVSUM = SMMA (i – 1) * N The smoothed sum of the previous bar
SMMA (i) = (PREVSUM – SMMA (i – 1) + CLOSE (i)) / N SMMA1 –SMMA (i) The smoothed moving average of the current bar
CLOSE (i) Current closing price
N Smoothing period

Linear Weighted Moving Average (LWMA) is calculated by multiplying each closing price by specific weighed coefficient.

LWMA = SUM (CLOSE (i)*i, N)/ SUM (i, N)

SUM (i, N) – total of weight coefficients

Signals

The main principle of moving average is to invest when there is a "crossover". On an occasion that the instrument’s price is less than their moving average it implies a bad deal and a downwards momentum, and vice versa.