Thursday, April 14, 2011
The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).A Simple Moving Average (SMA) is formed by computing the average (mean) price of a security over a specified number of periods. While it is possible to create moving averages from the Open, the High, and the Low data points, most moving averages are created using the closing price. For example: a 20-day simple moving average is calculated by adding the closing prices for the last 20 days and dividing the total by 20.In order to reduce the lag in Simple Moving Averages (SMAs), technicians often use Exponential Moving Averages (EMAs). EMAs reduce the lag by applying more weight to recent prices relative to older prices. The shorter the EMAs period is the more weight will be applied to the most recent price.