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Moving Average

The Basics

Moving averages are used to smooth out market volatility and identify
changes in trend.
Indicator Type
Trend follower

Markets
All cash and futures, not options

Works Best
Trending markets

Formula
(http://technicianapp.com/content
/uploads/2015/06/Moving-Averages-
Parameters.png)Moving averages can
be calculated from open, high, low,
close or some combination of these
data. Simple averages are means of
the data. Other averages assign higher
signi�cance to recent data than to
older data.

Technician allows you to calculate the

average based on open, high, low,
close or adjusted close data.
 You also
Section have a choice of several average types as follows.
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Simple: mean (average) of the data.

Exponential: newer data are weighted more heavily geometrically.

Time Series: Calculates a linear regression trendline using the “least

squares �t” method.

Triangular: Weighted average where the middle data are given the most
weight, decreasing linearly to the end points.

Variable: An exponential moving average with a volatility index factored

into the smoothing formula.  The Variable Moving average uses the
Chande Momentum Oscillator as the volatility index.

VIDYA: An exponential moving average with a volatility index factored into

the smoothing formula.  The VIDYA moving average uses the Standard
Deviation as the volatility index. (Volatility Index DYnamic Average)

Weighted: newer data are weighted more heavily arithmetically.

Welles Wilder: The standard exponential moving average formula

converts the time period to a fraction using the formula EMA% = 2/(n + 1)
where n is the number of days. For example, the EMA% for 14 days is
2/(14 days +1) = 13.3%. Wilder, however, uses an EMA% of 1/14 (1/n)
which equals 7.1%. This equates to a 27-day exponential moving
average using the standard formula.

Parameters
Commodities traders use 50-day simple averages. Bond traders use 10-day
weighted averages. Intraday traders use 3- and 5-day averages of highs and
of lows. Stock traders use 200- and 50-day averages. Long-term traders use
40 and 52-week averages. Day traders use hourly and minute.

Theory

The direction of the moving average (higher, lower or �at) indicates the trend
of the market and its slope indicates the strength of the trend. Longer
averages are used to identify longer-term trends and shorter averages are
used to identify shorter-term trends. Many trading systems utilize moving
 averages
Section as independent variables and market analysts frequently use
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moving averages to con�rm technical breakouts.

Interpretation

Typical analysis involves price crossovers with the average. It is a lagging

indicator but can con�rm that a change in trend has taken place. When
coupled with a trend line or support/resistance violation, the signal becomes
quite reliable. Averages give traders an idea of support and resistance areas
but they should not be used alone to determine trade triggers. Overshoots of
averages are common although using an envelope of the averages of highs
and of lows can help mitigate this.

(http://technicianapp.com/content/uploads/2015/06/Moving-Averages-
Chart.png)

The iShares 20+ year Treasury Bond ETF offers short-term analysis via the
10-day simple and exponential average. The latter reacts to market changes
faster than the former and crossovers between the two can help con�rm
short-term trend changes.

The 50-day average gives traders an idea of the intermediate-term trend and
extreme movements of price away from the average can indicate
overbought or oversold conditions Price crossovers indicate changes in the
intermediate-term trend.
 Math
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Moving Averages

Simple = P + P1 + … + P(n-1)

Weighted = n*P + (n-1)*P1 + (n-2)*P2 + … + P(n-1)

1+2+3+…+n

Exponential = P + aP1 + a2P2 + … + a(n-1)     P(n-1)

1 + a + a2   + …   + a(n-1)

Welles Wilder
P + wP1 + w2P2 + … + w(n-1)     P(n-1)
=

1 + w + w2   + …   + w(n-1)

Variable = P + (a*b)P1 + (a*b)2P2 + … + (a*b)(n-1)     P(n-1)

1 + (a*b) + (a*b)2   + …   + (a*b)(n-1)

Vidya = P + (a*bv)P1 + (a*bv)2P2 + … + (a*bv)(n-1)     P(n-1)

1 + (a*bv) + (a*bv)2   + …   + (a*bv)(n-1)

Same as weighted average except the middle data gets

Triangular =  the highest weight and the ends get arithmetically lower
weights

Where:   P = current price

P1 = price 1 period ago

P2 = price 2 periods ago

a= smoothing constant 2/(n+1)

Section
w =Navigation smoothing constant 1/n 

v= a*b and is variable

b= absolute value (F(P)/100)

F= Chande Momentum Oscillator (CMO) with Period 9

n= user-de�ned number of periods for the average

bv = 5 period std dev / 20 period std dev

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