The 7 Types of Moving Averages and How to Use Them
Learn about Simple Moving Averages (SMAs), Weighted Moving Averages (WMAs), Exponential Moving Averages (EMAs) and 4 other more in technical analysis. Understand their formulas, uses, and benefits. Exp...
ALGORITHMIC TRADING.MOST READ.
2/6/20243 min read
Let's start with the basics:
Simple Moving Average (SMA)
Invented by George Cole in the 18th century.
Formula: (SMA = frac{text{Sum of prices over a specified period}}{text{Number of periods}}).
Widely used for trend identification and smoothing price data.
Weighted Moving Average (WMA)
Introduced to technical analysis by Charles Dow.
Formula: (WMA = frac{sum (w_i times P_i)}{sum w_i}), where (w_i) is the weight for each period.
Assigns different weights to different periods, giving more significance to recent data.
Exponential Moving Average (EMA)
Proposed by Richard D. Wyckoff.
Formula: (EMA_t = alpha times P_t + (1 - alpha) times EMA_{t-1}), where (alpha) is the smoothing factor.
Reacts more quickly to recent price changes compared to SMA.
Triangular Moving Average (TMA)
Similar to SMA but places more weight on the center of the data.
Formula is a variation of SMA with adjusted weights.
Triangular Weighted Moving Average (TWMA)
Further refinement of TMA with adjusted weights for a smoother curve.
Wilder Moving Average (Wilder's MA)
Developed by J. Welles Wilder Jr.
Formula is similar to EMA but uses a smoothing constant that varies based on the volatility.
Geometric Moving Average (GMA)
Introduced by physicist Richard G. Brown.
Formula: (GMA = sqrt[n]{P_1 times P_2 times ldots times P_n}).
Suitable for analyzing trends over long periods.
Centered Moving Average (CMA)
Invented by Fred G. Martin.
It considers an equal number of data points before and after the current point for smoothing.
Variable Exponential Moving Average (VEMA)
Combines aspects of both EMA and SMA.
Adjusts the smoothing factor based on market volatility.
Profitable Trading Models
Moving Average Crossovers
Utilizes the crossover of different moving averages (e.g., SMA crossing above EMA) to identify trend reversals or continuations. Traders often use this as a signal to enter or exit positions.
Moving Average Convergence Divergence (MACD)
Incorporates two EMAs and a Signal Line (typically a 9-day EMA). The MACD line represents the difference between the two EMAs, while the Signal Line is an EMA of the MACD line. Traders analyze crossovers and divergences for potential buy or sell signals.
Bollinger Bands with SMA
Combines Bollinger Bands (volatility indicator) with a Simple Moving Average. Traders look for price movements outside the Bollinger Bands as potential reversal or breakout signals.
Triple Exponential Moving Average (TEMA)
A triple smoothing of price data, providing less lag compared to traditional EMAs. TEMA can offer earlier signals in trend identification.
Francisco F. De Troya
Algorithmic trading & derivatives professional.
Executive Chairman, Blockmas
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