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An Introduction to Moving Averages

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In this article, we will introduce you to one of the widely used indicators in technical analysis: the moving averages. We will explain what are moving averages and the types of moving averages.

What are Moving Averages

Moving averages are indicators in technical analysis that show the average value of a stock or futures price over a defined period. Moving averages take a number of past data points, calculate the average and then plot them onto a chart. This chart helps traders to focus on smoothed data rather than get distracted by the day-to-day price fluctuations.

Types of Moving Averages

There are three commonly used moving averages:

(1) Simple Moving Average (SMA)

Simple Moving Average (SMA)
The Simple Moving Average is the most common method where all of the past closing prices over a time period are added together and then the sum is divided by the number of prices used in the calculation. For example, in a 10-day moving average, the sum of the last 10 closing prices is calculated and then divided by 10.

(2) Linear Weighted Moving Average (LWMA)

Linear Weighted Moving Average is the least common moving average indicator. It is calculated by multiplying each of the previous days’ prices by weight. In Linear Weighted Moving Average, today’s price is given more weight than yesterday’s price which means that the oldest price receives a weighting of 1; the next oldest price receives a weighting of 2; and the next oldest price receives a weighting of 3, all the way up to the most recent rate. It is said that Linear Weighted Moving Average gives better volatility estimates than the simple moving average. Some traders find this method more relevant for determining trend especially in a fast-moving market.

(3) Exponential Moving Average (EMA)

Exponential Moving Average (EMA)
Exponential Moving Average uses a smoothing factor to place a higher weight on recent prices. Much more efficient than the Linear Weighted Moving Average, it is calculated by applying a percentage of today’s closing price to yesterday’s moving average value. Unlike the Simple Moving Average, Exponential Moving Average puts more weight towards recent data and less weight towards past data. This is why it is the mostly used moving average by technical traders.

We hope that this article has helped you understand about moving averages as they can be valuable tools in planning your trading strategy and help you have more winning trades.

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Wan Zuraiha Wan Zakaria is a staff writer at Oriental Pacific Futures (OPF) where she writes on investment and trading. OPF is a futures and options broker based in Kuala Lumpur, Malaysia and provides electronic trading, brokerage and clearing services to retail and institutional traders since 2007. OPF is licensed under the Securities Commissions of Malaysia and offers cash-settled derivatives instruments traded on Bursa Malaysia, as well as select major derivatives exchanges around the world.

Oriental Pacific Futures articles published on the Corporate Website (www.opf.com.my) may be reprinted, reposted or distributed free for educational purposes only on the condition that Oriental Pacific Futures and the Corporate Website link information http://www.opf.com.my are included. However, other organizations are invited to link to articles that are available in the public area of the Oriental Pacific Futures’ Learning Resources website. No additional permission is needed for such a link.