One would like to assign weightage to data points based on the ‘newness’ of the data. This also implies the price on 28 th is more sacred than the price on 25 th.

This means the latest price you see (on 28 th July) discounts all the known and unknown information. Remember the basic assumption of technical analysis – markets discount everything.

However, when it comes to markets, this may not always be true We are assuming that the data point on 22 nd July is as important as the data point on 28 th July. We are essentially giving each data point equal importance. When one calculates the average across these numbers, there is an unstated assumption. 13.2 – The exponential moving averageĬonsider the data points used in this example, Date But before that, let us learn about the Exponential Moving Average. So what does a moving average indicator, and how does one use it? There are many moving average applications, and shortly I will introduce a simple trading system based on moving averages. In the chart shown below, I have overlaid a 5 day SMA over ACC’s candlestick graph. The averages for the 5 days (or it could be anything like 5, 10, 50, 100, 200 days) are then joined to form a smooth curving line known as the moving average line, and it continues to move as the time progresses. Since we are calculating it as per the latest 5 days of data, it is called referred to as 5 Day SMA. As calculated above, a moving average is called a ‘Simple Moving Average’ (SMA). Cell RefĪs it is evident, the moving average changes as and when the closing price changes. Notice how the cell reference moves in the average formula, eliminating the oldest to include the latest data points. Any time frame can be selected from the charting software-based of your requirements.įor those of you familiar with excel, here is a screenshot of how moving averages are calculated on MS Excel. Moving averages can be calculated for any time frame, from minutes, hours to years. However, the closing prices are used mostly by the traders and investors as it reflects the price at which the market finally settles down. Sometimes, moving averages are also calculated using other parameters such as high, low, and open. In the above example, the calculation of the moving average is based on the closing prices. We are essentially moving to the latest data point and discarding the oldest to calculate the latest 5-day average. On 29 th, we would include 29 th data and exclude 22 nd data, on 30 th, we would include 30 th data point but eliminate 23 rd data, so on. Hence the average closing price of Marico over the last 5 trading sessions is 244.66Īs you can see, we have included the latest data (28 th July) and discarded the oldest data (21 st July) to calculate the 5-day average. We will drop the data point belonging to the 21st as our objective is to calculate the latest 5-day average. This implies now the ‘new’ latest 5 days would be 22 nd, 23 rd, 24 th, 25 th and 28 th. 28 th July (26 th and 27 th were Saturday and Sunday respectively) we have a new data point. Hence the average closing price of Marico over the last 5 trading sessions is 242.5 13.1 – The ‘moving’ average (also called the simple moving average)Ĭonsider a situation where you want to calculate the average closing price of Marico Limited for the latest 5 days. Hence the average closing price of ITC over the last 5 trading sessions is 343.95. The last 5-day average close would be calculated as follows: Date Therefore the average is just an estimate, and one cannot expect it to be accurate.Įxtending the concept to stocks, here are the closing prices of ITC Limited for the last 5 trading sessions. Likewise, person D drank just 3 bottles of beverage, which is way below the average of 5.8 bottles. For example, Person E drank 8 bottles of beverage, which is way above the average of 5.8 bottles. Obviously, there would be few of them who had consumed above and below the average. So, the average, in this case, tells us roughly how many bottles each person had consumed. He can quickly get a sense of ‘roughly’ how many bottles each of them consumed by dividing by. Assume the final count to be something like this: Sl NoĪssume a 6 th person walks in to find out 29 bottles of beverages lying around them. The sun is so bright and nice that each one of them ends up drinking several bottles of the beverage. Before we learn moving averages, let us have a quick recap on how averages are calculated.Īssume 5 people are sitting on a nice sunny beach enjoying a nice chilled bottled beverage. Moving averages are trend indicators and are frequently used due to their simplicity and effectiveness. We have all learnt about averages in school, moving average is just an extension of that.

20 ema crossing 200 ema