The exponential moving average, also referred to as EMA is a bit more complex than the simple moving average. As a new data point is introduced, it is incorporated into the calculation while the last data point is removed from the calculation. Each period is weighted equally in the calculation and the overall construction of the simple moving average line.įor example, a 20 period simple moving average line would be calculated by averaging the closing prices of the last 20 days. The simple moving average, also known as SMA, is calculated using the average price of an instrument over a specified number of periods. The first variation is the simple moving average and the second variation is the exponential moving average. There are two primary types of moving averages that are used in financial speculation. Obviously, we should be using additional technical analysis techniques in conjunction with the moving average trend filter to time our trades. So when the markets are trending in one direction, as evident from our moving average study, the probabilities favor that continued price action in that direction is more likely. One of the best ways to use moving averages is as a trend filter. Some traders may find this characteristic unappealing but, nevertheless, the proper application of moving average lines can be quite useful. However it’s important to understand that a moving average is a lagging indicator, and thus are most useful in defining what price has done in the past rather than what price is likely to do in the future. The primary function of moving averages is to help smooth the price data so that we can better gauge the overall price action of a trading instrument. Click Here To Download Understanding Moving Averages Download the short printable PDF version summarizing the key points of this lesson….
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