Moving Averages

I am back with another tutorial. Actually I thought of writing some trading post but then with the kind of comments I am getting, I guess you guys are looking forward to more tutorials. I still could have gone for some trading post but then anything can happen in Europe even on Sunday and it can make my post look stupid. So I decided to wait as anyways I am not sure if I can find some worthwhile trade in the present condition.

As I had said, I will start with Moving Averages as they are by far the most commonly used Technical Indicators.

We all understand what does Average mean? It is simply the mean value of a given set of data. Mathematically you add up all values/quantities and then divide the total with no (count) of values/quantities. It is clear to most of us till this point. So what then does a Moving Average (MA) mean? Well, when you have a long set of data and you make a subset of this data and calculate its Average on continuous basis, it is called as Moving or Rolling Average.

Let us say that I start noting the time taken to reach office everyday. I calculate the monthly average when I have 30 readings (I have really been going to office almost everyday these past 30 days). It will be Average time taken to reach office. Now when I have 31st reading, I can calculate Average time to office for last 31 days or I can still calculate the 30 day average but this time I will drop the very first reading and include 31st reading in the data. Similarly on 32nd day, I will drop first and second reading and include 31st and 32nd reading. So I will always be calculating Average time taken to reach office for last 30 days. Everyday I will add the new reading and take 30 readings backwards from that day and exclude all earlier readings. Bingo... it is 30 day Moving Average. The MA value keeps changing (moving) with the time and it gives my Average for last 30 days all the time.

This makes sense because for many markets we have data from 1960s or 1970s. If we take Average of this data for such long duration, it does not help much. Hence we take Moving Average of different duration like 5 days, 10 days, 20/21 days, 50/100/200 days depending on how much short term or long term we want to look at. We will see the significance of these duration as we go along. For the time being, I hope I have made it simple enough to understand.

Then lets get confused now. Market Pundits did not stop at creating MAs and live happily thereafter. They added further spice in it by creating variations of these MAs. There are many but the ones you can actually hear some place are;

• Simple Moving Averages (SMA)
• Exponential Moving Averages (EMA)
• Cumulative Moving Averages
• Weighted Moving Averages
• Wilder Moving Averages

We will be talking about only the first two of the lot. These are the ones that you will actually come across and use for trading.

Right now I am way past my Average sleeping time. I have not crossed it if I take Moving Average of last 30 days though. Will write next one quicker than you think.