TOPIC :

A.

B.

MOVING AVERAGE

Types of Moving Average

1.

Simple, Weighted, Exponential MA

2.

Computation

MA Signals
1.

Price & MA

2.

Two MAs

3.

Strength & Weakness of MA

DEFINITION
"Average"
95, 97, 96, 99, 101.
Average of 5 = 97.6
103, 104, 106, 108, 106.
Average of 5 = 105.4
TYPES OF MOVING AVERAGE
o

Simple Moving Average

All data equally important in the computation of the average.

Weighted & Exponential Moving Averages

Latest data is given more importance in the computation of the average.
SIMPLE MOVING AVERAGE CALCULATION
(5-DAY SMA)
Date
March 4
5
6
7
8
11
12
13
14
15
18
19
20

Price Data
95
97
96
99
101
103
104
106
108
106
103
104
100

5-Day Total

488
496
503
513
522
527
527
527
521

5-Day SMA

97.6
99.2
100.6
102.6
104.4
105.4
105.4
105.4
104.2

WEIGHTED MA CALCULATION
(5-DAY WMA)

Date

Price
Data

(1)
March

4
5
6
7
8
11
12
13
14
15
18
19

95
97
96
99
101
103
104
106
108
106
103
104

"5" x
LATEST
Price
(2)

505
515
520
530
540
530
515
520

"4" x
Price
ONE
PERIOD
before
(3)

396
404
412
416
424
432
424
412

"3" x
Price
TWO
PERIODS
before
(4)

"2" x
Price
THREE
PERIODS
before
(5)

"1" x
Price
FOUR
PERIODS
before
(6)

288
297
303
309
312
318
324
318

194
192
198
202
206
208
212
216

95
97
96
99
101
103
104
106

Total
of Cols
(2) to
(6)
(7)

WMA : Col
7 - sum
of all
factors
ie, 15.
(8)

1478
1505
1529
1556
1583
1591
1579
1572

98.5
100.3
101.9
103.7
105.5
106.1
105.3
104.8

20

100

500

416

309

212

108

1545

103.0

EXPONENTIAL MA CALCULATION
(5-DAY EMA)

Date

Price Data

(1)

Previous
Period's
EMA

(2)

Difference
between
latest price
& previous
EMA
(3)

Exponent
2
_______
n + 1
(n : number
of periods)
(4)

Exponent x
(Differential
between Pr
& Previous
EMA)

NEW EMA :
Previous EMA
+ Col 5

(5)
(6)

March

8
11
12
13
14
15
18
19
20

101
103
104
106
108
106
103
104
100

97.6
99.4
100.9
102.6
104.4
104.9
104.3
104.2

5.4
4.6
5.1
5.4
1.6
- 1.9
- 0.3
- 4.2

0.33
0.33
0.33
0.33
0.33
0.33
0.33
0.33
0.33

1.78
1.52
1.68
1.78
0.53
- 0.63
- 0.10
- 1.39

97.6
99.4
100.9
102.6
104.4
104.9
104.3
104.2
102.8

COMPARING SIMPLE, WEIGHTED & EXPONENTIAL MA's

Date

Price

March

8
11
12
13
14
15
18
19
20

101
103
104
106
108
106
103
104
100

5-Day SMA

5-Day EMA

5-Day WMA

97.6
99.2
100.6
102.6
104.4
105.4
105.4
105.4
104.2

97.6
99.4
100.9
102.6
104.4
104.9
104.3
104.2
102.8

98.5
100.3
101.9
103.7
105.5
106.1
105.3
104.8
103.0

Relative Distance from Price

Closest to Price :
Weighted MA
Midway :
Exponential MA
Furthest from Price :
Simple MA

MOVING AVERAGE SIGNALS

Signal 1: Price & MA
1.

In a trending market, MA serves as a trendline.

o
o

2.

Uptrend MA provides possible support levels.

Downtrend - MA provides possible resistance levels.

Sideways Market
Price oscillates around MA, providing no support or resistance levels.

3.

Number of Periods for MA

o

Small number of periods

MA is calculated using the recent few data. Result is the MA is closer in value to
current price. In effect the MA line is plotted closer to the price.

Large number of periods

MA is calculated using more data, and is therefore affected by more of the
historical data. Consequently the large number MA line is positioned further away
from the price compared to the small number MA line.
The choice of MA periods can range from as small as 5 periods to as large as 200.

When using a small number MA, price reaches MA line easily. The small MA
then becomes the nearer support or resistance.

When using a large number MA, price reaches MA line less frequently. The large
MA then becomes the further support or resistance.

4.

Recommended short-term MA : 10 period EMA.

Recommended long-term MA : 40 period EMA.

5.

During a trend, near support/resistance at 10 EMA. Should 10 EMA break, next

support /resistance is 40 EMA.

Signal 2 : Interaction between 10 & 40 EMA

1.

2.

Trending Market
a.

Uptrend : When 10 EMA crosses above 40 EMA.

b.

Downtrend : When 10 EMA crosses below 40 EMA.

Process of Change of Trend

From Downtrend to Uptrend
o

Early signal - Price crossing from below 10 EMA to above 10 EMA.

Intermediate signal - Price continues to cross above 40 EMA.

Final signal - 10 EMA crosses above 40 EMA.

From uptrend to downtrend

3.

Early signal - Price crosses from above 10 EMA to below 10 EMA.

Intermediate signal - Price crosses below 40 EMA.

Final signal - 10 EMA crosses below 40 EMA.

Congesting Market
10 EMA crosses and recrosses 40 EMA.

STRENGTH & WEAKNESS OF MA

Strength - Excellent in following a trend.
Weakness - Little or no role in congesting market.