Another indicator that can be used in online trading charts is the moving average , a function widely used for the analysis of historical series and especially for technical analysis .
In trading platforms ( particularly in this one that we recommend ) this type of graphical function can be configured and can generally be found in three types: simple, exponential and weighted .
In this lesson we will see what these three types of moving average consist of and how they differ, without going into too many technical details that you can personally deepen according to your needs. Interesting, right? Find out how easy it is to apply them with one click on the eToro platform.
The simple moving average
The simple moving average (SMA, Simple Moving Average), also called arithmetic and in fact is by far the most used by analysts and those who play online in the stock values.
In this average, the data from a given period is used and the average is calculated simply by adding it and dividing the total by the number of values (for example, 3 + 5 + 6 + 8 and dividing by 4).
However, the simple moving average is subject to criticism as each value is given equal importance (or weight). In practice, if we had a 10-period moving average, we would give the same weight to each individual value (10% in 10 periods).
Weighted moving average
The weighted moving average (WMA, Weighted Moving Average) serves to fix the problem highlighted above with respect to the simple moving average. In this type of media, greater weight is given to the last values of a series. As for the final calculation, it remains unchanged: all the values of the same series are added.
For example, if we had 10 periods, we would associate “weight” 1 with the first value, “weight” 2 with the second, and so on. These “weights” must be multiplied by the value of the data. For example, if the first period has the value 3, we will multiply it by the weight 1 and we will give the last value 3. If the fifth period is 7, we will multiply it by 5 and we will obtain 35 as the last value. In the end, therefore, they all add up the final values and divide them by the sum of the weights used. Example with three points (5-6-7): the result will be [(5 × 1) + (6 × 2) + (7 × 3) / (1 + 2 + 3)] or 38/6 = 6.3333.
This medium is also subject to criticism, as it does not provide an instant idea of what is happening in the market .
Exponential moving average
The exponential moving average (EMA Exponential Moving Average) is much more complex than the averages seen before and, therefore, is most used by more experienced users. As in the weighted average, an attempt is made to give a different weight to the different prices (or values) considered, also in this case greater than the most recent and less than the oldest, but with the difference that it takes into account many more data (eg many “old” values)
Being an average with a very difficult calculation, it is practically impossible to generate except through the use of a computer.
However, two values are considered to calculate the exponential moving average:
- The arithmetic mean (top view)
- The Alpha coefficient, which will make the average more responsive. To calculate Alpha we use this formula: Alpha = 2 / (n + 1) where n is the number of periods
The exponential moving average will be given by:
EMA (mmexponential) = (Cerrar – previous EMA) * Alpha + previous EMA
Compared to the weighted average, the weights are assigned a non-linear, progressive exponential value. Therefore, the difference in “weight” between the different values varies exponentially.
Go to the next lesson on MACD .
Mobile Media FAQs
What is the moving average?
The moving average is a very popular indicator used for technical analysis in online trading. It is given by the average of data recorded in the last days of a given period.
How is the moving average calculated in practice?
The result is a line placed on a chart, which the trading platform calculates automatically when necessary.
What are the different types of moving average?
Simple, weighted and exponential.
What signals does the moving average offer?
If used in conjunction with other indicators, it can offer bullish or bearish signals or trends, or offer confirmations to signals offered by other indicators.