Since the sum of all the weights must equal 100%, the weights of the preceding 10 days must equal:įor this example, the weight of the preceding 10 days is 100% - 18.18% = 81.82%. Weight current = 2 / (Number of Days in Moving Average + 1) The formula to calculate the weight of the last day is: So for a 10-day moving average, the EMA uses 11 days, with the last day given a weight of 2/11 of the average, which equals 18.18%. This greater weight causes the EMA to follow the underlying prices more closely most of the time than the SMA of the same duration.Īlthough moving averages can be calculated in many different ways, the traditional method of calculating the EMA is to add an additional day to the simple moving average, but to give greater weight to the last day. To correct this anomaly, exponential moving averages ( EMA) are used, where greater weight is given to more recent prices. If the earliest day was volatile, but the market has recently calmed, then the volatile day will have a large influence on the average - known as a drop-off effect - which would not best represent the current market. The problem with simple moving averages is that the earliest day of the time period has the same weight in the average as the most recent day. However, even crossovers may give false signals, particularly in whipsaw markets, so moving averages are often used with other technical indicators as a confirmation of the trend change. So if the shorter moving average crosses above the longer-term average, then this indicates a beginning of an uptrend, while a downward cross may indicate the beginning of a downtrend. Traders will often use the crossovers as a buy or sell signal and as a good price to set trailing stops. Traders often use crossovers, where the graph of the shorter moving average crosses over a longer moving average, as a good indication of a new trend. To minimize false signals, especially in a whipsaw market that trades within a narrow range, multiple moving averages of different time spans are used together. Note that the 5-day moving average tracks the DJIA much more closely than the other moving averages. Graph of the Dow Jones Industrial Average (DJIA) from Mato March 3, 2009, showing the 50-day, 20-day, and 5-day moving averages. Moving averages based on shorter time spans more closely reflect the underlying current trend, but they are also more sensitive to the volatility of the markets, which can generate many false signals. They can only indicate a trend that is already in place. The input variables to the AVERAGE function can be references to cells with imported stock prices, which makes their calculation even easier.īecause moving averages are based on data in a preceding period, they are lagging indicators. Thus, with Microsoft Excel, this moving average can be calculated thus: Since a simple moving average is only an average where the last value is added and the first value is dropped for each day, a simple moving average can also be calculated using a spreadsheet's AVERAGE function. If the last 3 closing prices of a stock are $9, $11, and $12, what is its 3-day simple moving average? Example - Calculating a Simple Moving Average
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