Moving Average

MA is essentially a trend following device, it is a follower not a leader.

Simple Vs Exponential:

From Come into my trading room by Alexander Elder

The trouble with a simple MA is that each price affects it twice—when it comes in and when it drops out. A high new value pushes up the moving average, giving a buy signal. This is good; we
want our MAs to respond to new prices. The trouble is that 10 days later, when that high number drops from the window, the MA also drops, giving a sell signal. This is ridiculous because if we shorten a simple MA by one day, we’ll get that sell signal a day sooner, and if we lengthen it by a day, we’ll get it a day later. We can engineer our own signals by fiddling with the length of a simple MA! An exponential moving average (EMA) overcomes this problem. It reacts only to incoming prices, to which it assigns more weight. It does not drop old prices from its time window, but slowly squeezes them out with
the passage of time.

An exponential moving average is slow but steady, like a directional indicator on a steamroller. EMA works in all timeframes but shines on the weeklies, where it helps you stay with the major trend no matter how hard it tries to shake you off. Trading in the direction of a weekly moving average should help you get ahead of many traders. You can position yourself in the direction of the EMA and hold, or else trade in and out,
using daily charts.

After a bit of studying at the i am feeling i should use EMA, if you look at MACD it uses EMA in its calculations as SMA does not give importance to recent price actions have to see how i will go….

 

A simple moving average is formed by computing the average (mean) price of a security over a specified number of periods. While it is possible to create moving averages from the Open, the High, and the Low data points, most moving averages are created using the closing price. 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 + 12 + 13 + 14 = 60

(60 / 5) = 12

Exponential moving average :In order to reduce the lag in simple moving averages, technicians often use exponential moving averages (also called exponentially weighted moving averages). EMA's reduce the lag by applying more weight to recent prices relative to older 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 example: a 10-period exponential moving average weighs the most recent price 18.18% while a 20-period EMA weighs the most recent price 9.52%. As we'll see, the calculating and EMA is much harder than calculating an SMA. The important thing to remember is that the exponential moving average puts more weight on recent prices. As such, it will react quicker to recent price changes than a simple moving average. Here's the calculation formula.

Google around for the calculation of this moving average

the exponential moving average is more sensitive to changes to price than a simple moving average but less than weighted moving average.

What Data to Average? Traders who rely on daily and weekly charts usually apply moving averages to closing prices. This makes sense, because they reflect the final consensus of value, the most important price of the day. The closing price of a five-minute or an hourly bar has no such special meaning. Day-traders are better off averaging not closing prices, but anaverage price of each bar. For example, they can average Open + High + Low + Close of each bar, divided by four, or High + Low + Close divided
by three.We can apply moving averages to indicators, such as Force Index (seebelow). A raw Force Index reflects price changes and volume for the day.Averaging produces a smoother plot and reveals a longer-term trend ofForce Index.

How Long a Moving Average? Moving averages help identify trends. A rising MA encourages you to maintain longs, whereas a falling MA tells you to hold shorts. The wider the time window, the smoother is a moving average. That benefit has a cost. The longer a moving average, the slower it responds to trend changes. The shorter a moving average, the better it tracks prices, but the more subject it is to whipsaws, temporary deviations from the main trend. If you make your moving average very long, it will
miss important reversals by a wide margin. Shorter MAs are more sensitive to trend changes, but those shorter than 10 bars defeat the purpose of a trend-following tool.
At the time I wrote Trading for a Living, I was using 13-bar MAs, but in recent years I switched to longer moving averages to catch more important trends and avoid whipsaws. To analyze weekly charts, start with a 26-week moving average, representing half a year’s worth of data. Try to shorten that number and see whether you can do it without sacrificing the smoothness of your MA. On the daily charts, start with a 22-day MA, reflecting roughly
the number of trading days in a month, and see whether you can make it shorter. Whatever length you decide to use, be sure to test it on your own data. If you track just a handful of markets, you’ll have enough time to try different lengths of moving averages until you get smoothly flowing lines.The width of any indicator time window is best expressed in bars rather
than days. The computer doesn’t know whether you are analyzing daily, monthly, or hourly charts; it sees only bars. Whatever we say about a daily MA applies to the weekly or the monthly. It’s better to call it a 22-bar MA rather than a 22-day MA.
Mathematically savvy traders can look into using adaptive moving averages whose length changes in response to market conditions, as advocated by John Ehlers, Tushar Chande, and Perry Kaufman. Ehlers’ latest book, Rocket Science for Traders, delves into adapting all indicators to current market conditions.