MOVING AVERAGE

The simple moving average is formed by computing the average price of a security over a specified number of
periods. Whenever you input a variable for a simple moving average calculation, it is always the close price of the
security that will be included in the calculation. For example: a 5-day simple moving average is calculated by adding
the closing prices for the last 5 days and dividing the total by 5. For an example, here are the closing prices of ABC
stock.

15+16+17+18+19 = 85
85 / 5 = 17

The averages are then joined which creates a curvilinear line, or the moving average line. Continuing our example, if
the next closing price in the average is 20, then this new period would be added. As each days ends, a new day will
be added and the oldest day will be eliminated (15). Once a price has broken a moving average line, and depending
on what type of time frame, it might signal a shift upwards or downwards. As you see in the picture below, it has
broken all three moving average lines in the upward direction, and as you can see, it continued to climb higher.

DATE S&P CNX NIFTY 10 DAYS TOTAL 10-MA

1-Feb-11 5,417.20
2-Feb-11 5,432.00
3-Feb-11 5,526.75
4-Feb-11 5,395.75
7-Feb-11 5,396.00
8-Feb-11 5,312.55
9-Feb-11 5,253.55
10-Feb-11 5,225.80
11-Feb-11 5,310.00
14-Feb-11 5,456.00
15-Feb-11 5,481.00 53,789.40 5378.94
16-Feb-11 5,481.70 53,839.10 5383.91
17-Feb-11 5,546.45 53,858.80 5385.88
18-Feb-11 5,458.95 53,922.00 5392.2
21-Feb-11 5,518.60 54,044.60 5404.46
22-Feb-11 5,469.20 54,201.25 5420.125
23-Feb-11 5,437.35 54,385.05 5438.505
24-Feb-11 5,262.70 54,421.95 5442.195
Characteristics of Simple Moving Averages (MA)
1. An MA is a smoothed version of a trend and the average itself is an area of
support and resistance. In a rising market, price reactions are often reversed
as they find support in the area of the MA, similarly, a rally in a declining
market often meets resistance at an MA and turns down. The more times an
MA has been touched, that is, when it acts as a support or resistance area.
The greater the significance when it is violated.

2. A carefully chosen MA should reflect the underlying trend; its violation

therefore warns that a change in trend may already have taken place. If the
MA is flat or has already changed direction, its violation is fairly conclusive
proof that the previous trend has reversed.

3. If the violating occurs while the MA is still prodding sharply in the direction of
the prevailing trend, this should be treated as a preliminary warning that a
trend reversal has taken place. Confirmation should await a flattening in the
angle of ascent or descent, a change in direction in the MA itself, or
alternative technical sources. The crossover of a moving average with a
sharp angle of ascent or descent is akin to the violation of a trend line with a
sharp angle.

4. Generally speaking, the longer the time span covered by an MA, the greater
the significance of a crossover Signal. For instance, the violation of 18-month
MA is a substantially more important than the crossover of a 30-day MA.
 5. Reversal in the direction of an MA is usually more reliable than an
MA crossover. In instances in which a change in directions occurs close to a
market turning point, a very powerful and reliable signal is given.

MULTIPLE MOVING AVERAGES

The Multiple Moving Averages Crossover Indicator was designed to allow a trader to
take advantage of the various types of moving averages available in Trade Station
and combine them into a 2 line or 3 line moving average indicator with a crossover
feature. Currently, different types of moving averages i.e.; simple, exponential,
weighted, etc., cannot be mixed with the standard set of indicators in a crossover
feature. The Multiple Moving Averages Crossover Indicator removes that limitation
and allows any combination of moving averages to be used with a crossover alert
feature. This gives the trader much more flexibility in defining and observing
moving average crossovers. Our Multiple Moving Averages Crossover Indicators
contain moving average cross plots as well as integrated optional bullish and
bearish paint bar alerts. The moving average lines contain various coloring features
based on their slope or their relative positioning.

Moving averages are one of the oldest and most used technical indicators in
existence. Traders can use the Multiple Moving Averages Crossover Indicator to
customize their moving average crossovers with all the available moving averages
included in Trade Station.

Many traders use moving averages and crossings of different moving averages to
help them determine trend changes or the strength of a trend. For example, using a
2 line simple moving average with lengths of 5 for the fast average and 20 for the
slow, a cross of the 5 period moving average up through the 20 period would signal
the possibility of a bullish trend change. Also, if the 5 period crossed up through the
20 period and began to separate and continue moving further away from the 20
period average, this would indicate a strengthening trend. A popular moving
average method is the use of 3 moving averages with different lengths. Use the
flexibility of the Multiple Moving Averages Crossover Indicator to customize and
monitor your own moving average method.
WEIGHTED MOVING AVERAGE
An MA can correctly represent a trend from a statistical point of view only if it is
centered, but centering an average delays the signal. One technique that attempts
to overcome this problem is to weight the data in favor of the most recent
observations. An MA constructed in this manner can turn or reverse direction much
more quickly than a simple MA, which is calculated by treating all the data equally.

There are countless ways in which data can be weighted, but the most widely used
method is a technique whereby the first period of data is multiplied by 1, the second
by 2, the third by 3, and so on until the latest one is multiplied. The calculations for
each period are then totaled. The divisor of simple MA is the number of periods, but
for this form of weighted average, the divisor is the of the weights: that is
1+2+3+4+5+6=21.table below illustrates how the calculations are made.

(col3) (col4) (col5) (col6) (col7)

5x 4x 3x 2x 1x (col8)
(col1)
(col2) col1 1 col1 2 col1 3 col1 4 col1 5 SUM WMA=
S&P
CNX 6x day day day day day OF col8/2
Date NIFTY col1 ago ago ago ago ago col2-7 1
23 Feb,
2011 5,437.35
22 Feb,
2011 5,469.20
21 Feb,
2011 5,518.60
18 Feb,
2011 5,458.95
17 Feb,
2011 5,546.45
16 Feb, 32890 27732. 21835 10938 5437. 115389 5494.7
2011 5,481.70 .2 25 .8 16555.8 .4 35 .8 52
15 Feb, 27408. 22185 16376.8 11037 5469. 115363 5493.5
2011 5,481.00 32886 5 .8 5 .2 2 .6 02
14 Feb, 21926 16639.3 10917 5518. 115143 5483.0
2011 5,456.00 32736 27405 .8 5 .9 6 .7 31
11 Feb, 11092 5458. 5431.4
2011 5,310.00 31860 27280 21924 16445.1 .9 95 114061 74
10 Feb, 31354 10963 5546. 112681 5365.7
2011 5,225.80 .8 26550 21824 16443 .4 45 .7 93
9 Feb, 31521 5481. 5319.1
2011 5,253.55 .3 26129 21240 16368 10962 7 111702 43
8 Feb, 31875 26267. 20903 111369 5303.2
2011 5,312.55 .3 75 .2 15930 10912 5481 .3 98
7 Feb, 26562. 21014 111706 5319.3
2011 5,396.00 32376 75 .2 15677.4 10620 5456 .4 5
4 Feb, 32374 21250 15760.6 10451 5339.3
2011 5,395.75 .5 26980 .2 5 .6 5310 112127 79
3 Feb, 33160 26978. 15937.6 10507 5225. 113393 5399.7
2011 5,526.75 .5 75 21584 5 .1 8 .8 05

The interpretation of a weighted average is different from that of a simple MA

because the weighted MA is more sensitive. Warning of a trend reversal is given by
change in direction of the average rather than by a crossover.

The Exponential Moving Average

Weighted MAs are helpful for the purpose of identifying trend reversals. However,
the time-consuming calculations required to construct maintain such averages prior
to the widespread use of computers greatly detracted from their usefulness. An
exponential moving average (EMA) is a shortcut to obtaining a form of weighted MA.
In order to construct a 10-days EMA, it is necessary to calculate a simple 10-days
MA first, that is , the total of 10 days observations divided by 10. The 10 days
average becomes the starting point for the EMA, and the difference is added or
subtracted and posted in column 3; 5481-5372.60=108.44. This difference is then
multiplied by the exponent, which for a 10-week EMA is 0.2. This exponentially
treated difference, 108.44x0.2, is then added to previous week’s EMA, and the
calculation is repeated each succeeding week.
 (3)
(2) Differenc
EMA for e (4) (5)
(1)
S&P CNX previous (col1- Expon col3xcol EMA=col2+co
DATE NIFTY week col2) ent 4 l5
1-Feb-11 5,417.20
2-Feb-11 5,432.00
3-Feb-11 5,526.75
4-Feb-11 5,395.75
7-Feb-11 5,396.00
8-Feb-11 5,312.55
9-Feb-11 5,253.55
10-Feb-11 5,225.80
11-Feb-11 5,310.00
14-Feb-11 5,456.00 5372.56
15-Feb-11 5,481.00 5372.56 108.44 0.2 21.688 5394.248
16-Feb-11 5,481.70 5394.248 87.45 0.2 17.4904 5411.738
17-Feb-11 5,546.45 5411.738 134.71 0.2 26.94232 5438.681
18-Feb-11 5,458.95 5438.681 20.27 0.2 4.053856 5442.735
21-Feb-11 5,518.60 5442.735 75.87 0.2 15.17308 5457.908
22-Feb-11 5,469.20 5457.908 11.29 0.2 2.258468 5460.166
23-Feb-11 5,437.35 5460.166 -22.82 0.2 -4.56323 5455.603
24-Feb-11 5,262.70 5455.603 -192.90 0.2 -38.5806 5417.022

The correct exponents for various time spans are shown in table below. Exponents
for time period other than those shown in table can easily be calculated by dividing
2 by the time span. For example for 5-days 2/5 gives an exponent of 0.4.

Number Exponen
of day ts
5 0.4
10 0.2
15 0.13
20 0.1
40 0.05
80 0.25
EMA crossovers and reversals occur simultaneously. Bye and sell signals are
therefore triggered in the same way as simple MA crossovers.