Moving Average Methods - 5 Ways to Calculate Moving Averages

Moving Average Methods
5 Ways to Calculate Moving Averages

Moving Average Methods
The Most Popular Technical Indicators for Traders
Moving average is the most popular technical analysis tool. It can be calculated as the average price at given time. By having the average price, the trend can rule out some meaningless price fluctuations.

How to use these moving average methods?

Moving average demonstrates investors' common expectation.

During range trading, moving average tends to move in sideways. It shows that investors more or less agreed to the current price. On the other hand, it tends to move in an upward or downward direction during trend trading market. This indicates investors have different price expectation than the trading price.

So, if you know what the market expectation is in general, you can take position and start trading!

Moving Average Methods #1: Simple Moving Average

Simple moving average can be calculated by adding up the price and dividing the sum with number of days. For example, if the prices for 3 days are $55, $59 and $47, the simple moving average will be $53.67.

Moving Average Methods #2: Weighted Moving Average

Weighted moving average is about giving more weight to the most current prices. For example,

Day	Price	Weight
3rd	$47	X 3	141
2nd	$59	X 2	118
1st	$55	X 1	55
SUM		6	314

The WMA will be 314 divide by 6, which equal to $52.33.

Moving Average Methods #3: Exponential Moving Average

Exponential moving average is same as WMA except it reduces the importance of the older prices exponentially. Thus, it tracks price movement much closer than both WMA and Simple Moving Average.

Moving Average Methods #4: Displaced Moving Average

Displaced Moving Average (DMA) is the same as Simple Moving Average, except that the trend shifted to the right by certain number of days.DMA usually used as a confirmation signal.

Moving Average Methods #5: Moving Average Crossover

Moving Average Crossover used both short term and long term moving averages. The idea is to compare short term market expectation with long term price demand.

How do you know when to sell stocks or buy them?

If the market price is lower than the moving averages, you can assume that most investors is increasingly bearish. You can start selling the stocks or get ready to use stop loss order. However, if you prefer value investing strategy instead, you may prepare yourself to buy more shares if the stock is undervalued.

Secondly, if the share prices is higher than the moving averages, that can be a signal of market momentum. This can be due to bullish market expectation.
You'll make money if you manage to buy the stock early of the trend cycle. In fact, keep on riding the bull market is the sweetest thing you'll experience but keep your eyes open if the trend starts to go in reverse direction. Calculating the moving averages can be time consuming, which is why most traders prefer to leverage on stock trading software to give them the accurate trading signal.

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Moving Average Methods5 Ways to Calculate Moving Averages