Stock Performance And Future Price Movement Indicators: Moving Average
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I was reading today’s issue of the Financial Times and came across this interesting article by Kavita Sriram where she outlines few technical indicators which can be applied to analyze stock market movements. I decided to dig in and find more about those measures and in this post I share what I learnt.
In this post I talk about the indicator: moving average.
Moving average
One of the easiest and most popular indicators to use and serves as the foundation stone for various other indicators. Using this measure charts are built which indicate if a stock price is on its way up or down. One can choose to buy if the stock price rises above its moving average and one can sell if it falls below its moving average.
- Simple Moving Average (SMA): It is calculated by taking the average of price over a given number of periods. 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.
10+ 11 + 11 + 13 + 10 = 55
SMA = 55 / 5 = 11
(image source: stockcharts.com)
- Exponential Moving Average (EMA): It is a weighted measure which gives more weight to recent stock prices. The weighting applied to the most recent price depends on the specified period of the moving average. The shorter the EMA’s period, the more weight that will be applied to the most recent price. For details on how to calculate this please refer here.
(image source: stockcharts.com)
Here is a video from YouTube which does some analysis on stocks and might provide useful tips on how to analyze stock prices:
Exponential moving averages may be prone to quicker breaks and some people use it to for shorter time periods to capture changes quicker. SMA is used by some people to analyze long term trends.
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