Moving Average Calculations - Essay Example

Moving Average Calculations Table of Contents 2 Table of Contents 2 Overview 3 Simple Moving Average 3 Exponential Moving Average 4 Weighted Moving Average 4Work Cited 5OverviewThe term ‘moving average’ is also referred as rolling average or running average. It can be defined as the average price of an investment policy over an explicit phase of time. It is one of the significant methods utilized for the calculation of momentum as well as it also provides a detailed overview about the stock price fluctuations.

Hence, it is beneficial for analyzing the current as well as future trends and patterns of any investment. There are varied ways to calculate moving average for any particular investment namely simple moving average, exponential moving average and weighted moving average among others (Achelis, S. B., “Technical Analysis from A to Z”).Simple Moving AverageSimple Moving Average is one of the most important methods utilized for the calculation of moving average. It is denoted by SMA. It is calculated by measuring the average concluding price of a stock along with large number of time periods.

It is one of the simple types of moving averages. It mainly includes two different parameters such as ‘period’ and ‘cost’. Moreover, in most of the times, the total number of periods is calculated along with closing value of the stocks. The formula used for the calculation of simple moving average is , where n denotes the number of time periods and Pn is the cost or price required to calculate SMA. The prime benefit of SMA is that it is quite an easy method and is used by most of the traders all over the world (Achelis, S. B., “Technical Analysis from A to Z”).

Exponential Moving Average Exponential Moving Average is the other important practice utilized for calculation of moving average. It is also denoted as EMA. It is almost similar to SMA except the average is calculated with the help of the most recent price. It is the only reason that many scientific analysts prefer using EMA rather than SMA for examination. The formula utilized for the calculation of EMA is: EMA (current) = ((Price (current) – EMA (prev)) x Multiplier) + EMA (prev).

The value of EMA changes with alterations in the number of periods which is denoted by ‘multiplier’. Moreover, the method of EMA is also beneficial as it offers the most exact value. Apart from these, it only requires the previous days average value rather than the data of entire phase. Thus, it is more advantageous than SMA (Achelis, S. B. “Technical Analysis from A to Z”).Weighted Moving AverageA Weighted Moving Average is also the other vital practice utilized for the calculation. It is also a quite well known method.

It is denoted as WMA. A weighted moving average provides more importance on the recent figures rather than on past data. The weighted moving average is calculated by multiplying each figure with a factor from the first day to (n) number of days, and the end result is finally divided by total number of multiplying factors. It is calculated by averaging all the preceding data over a given phase of time, which is then weighted ‘linearly’ (Achelis, S. B., “Technical Analysis from A to Z”).

Apart from these, weighted moving average reacts more rapidly to current changes rather than SMA. Hence, it is most preferred rather than any other moving average methods. Work CitedAchelis, Steven B. Technical Analysis from A to Z McGraw-Hill Professional, 2001.