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Moving Average An indicator frequently used in technical analysis showing the average value of a security's price over a set

period. Moving averages are generally used to measure momentum and define areas of possible support and resistance

Moving averages are used to emphasizethe direction of a trend and to smooth out price and volume fluctuations, or "noise", that can confuse interpretation. Typically, upward momentum is confirmed when a short-term average (e.g.15-day) crosses above a longer-term average (e.g. 50-day). Downward momentum is confirmed when a short-term average crosses below a long-term average. Usually, when a stock price moves above its 50-100 day moving average, things are in favor. The opposite is true for stocks that protrude their moving average There are 2 types of Moving Average : Simple & Exponential Moving Average Simple Moving Average - SMA A simple, or arithmetic, moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react.

In other words, this is the average stock price over a certain period of time. Keep in mind that equal weighting is given to each daily price. As shown in the chart above, many traders watch for short-term averages to cross above longer-term averages to signal the beginning of an uptrend. As shown by the blue arrows, short-term averages (e.g. 15-period SMA) act as levels of support when the price experiences a pullback. Support levels become stronger and more significant as the number of time periods used in the calculations increases. How is it calculated? A simple moving average is formed by computing the average price of a security over a specific number of periods. Most moving averages are based on closing prices. A 5-day simple moving average is the five day sum of closing prices divided by five. As its name implies, a moving average is an average that moves. Old data is dropped as new data comes available. This causes the average to move along the time scale. Below is an example of a 5-day moving average evolving over three days. Daily Closing Prices: 11,12,13,14,15,16,17 First day of 5-day SMA: (11 + 12 + 13 + 14 + 15) / 5 = 13 Second day of 5-day SMA: (12 + 13 + 14 + 15 + 16) / 5 = 14 Third day of 5-day SMA: (13 + 14 + 15 + 16 + 17) / 5 = 15 The first day of the moving average simply covers the last five days. The second day of the moving average drops the first data point (11) and adds the new data point (16). The third day of the moving average continues by dropping the first data point (12) and adding the new data point (17). In the example above, prices gradually increase from 11 to 17 over a total of seven days. Notice that the moving average also rises from 13 to 15 over a three day calculation period. Also notice that each moving average value is just below the last price. For example, the moving average for day one equals 13 and the last price is 15. Prices the prior four days were lower and this causes the moving average to lag. Complicated? No worries, you have software to calculate them for you...... Generally, when you hear the term "moving average", it is in reference to a simple moving average. This can be important, especially when comparing to an exponential moving average (EMA)

Exponential Moving Average - EMA Mean? A type of moving average that is similar to a simple moving average, except that more weight is given to the latest data. The exponential moving average is also known as "exponentially weighted moving average".

This type of moving average reacts faster to recent price changes than a simple moving average. The 12and 26-day EMAs are the most popular short-term averages, and they are used to create indicators like the moving average convergence divergence (MACD) and the percentage price oscillator (PPO). In general, the 50- and 200-day EMAs are used as signals of long-term trends How is it calculated? Exponential moving averages reduce the lag by applying more weight to recent prices. The weighting applied to the most recent price depends on the number of periods in the moving average. There are three steps to calculating an exponential moving average. First, calculate the simple moving average. An exponential moving average (EMA) has to start somewhere so a simple moving average is used as the previous period's EMA in the first calculation. Second, calculate the weighting multiplier. Third, calculate the exponential moving average. The formula below is for a 10-day SMA: 10 period sum / 10 Multiplier: (2 / (Time periods + 1) ) = (2 / (10 + 1) ) = 0.1818 (18.18%) EMA: {Close - EMA(previous day)} x multiplier + EMA(previous day). A 10-period exponential moving average applies an 18.18% weighting to the most recent price. A 10period EMA can also be called an 18.18% EMA. A 20-period EMA applies a 9.52% weighing to the most recent price (2/(20+1) = .0952). Notice that the weighting for the shorter time period is more than the weighting for the longer time period. In fact, the weighting drops by half every time the moving average period doubles. Complicated? No worries, you have software to calculate them for you......

Which one is better? Even though there are clear differences between simple moving averages and exponential moving averages, one is not necessarily better than the other. Exponential moving averages have less lag and are therefore more sensitive to recent prices - and recent price changes. Exponential moving averages will turn before simple moving averages. Simple moving averages, on the other hand, represent a true average of prices for the entire time period. As such, simple moving averages may be better suited to identify support or resistance levels. Examples of Time periods in moving averages For Long term investments = crossover of 100 & 200 days For Postional Calls = crossover of 50 & 100 days For Short term = Crossover of 12 & 26 days For Intraday = Crossover of 20 & 60minutes

Useage of the tool for trading purpose: Futures Stocks Forex Commodities Where do we get them For intraday, it is available in our Nest trader software For Positional you can refer to http://finance.yahoo.com/ >get Quotes>basic technical Analysis