Simple Moving Average

[paragon]

HI there, i can see that some of us are indepth in the stockmarket. Please, i would like to know what simple moving average are and how to apply them. Also, how can they be calculated?

Thanks

[SpecNomics]

These definitions are from a weekly newletter I get from SOCGEN.

Moving averages
Moving averages are calculated by the addition of the closing price of the N last sessions divided by the number of sessions considered. They can be used to track daily, weekly, or monthly patterns. DayGraph uses 20 and 50 periods. Moving averages provide a good indication of the whole trend affecting an underlying. Reversing situations can be found on the upside and on the downside. Moving averages can constitute supports or resistances by themselves for spot prices.

Support
Level that has a high probability of halting a fall on the time horizon considered, and consequently, possibly to cause a bounce.

Resistance
Level that has a high probability of halting a rally on the time horizon considered, and consequently, to cause a correction.

The most straight forward application is re placing convergence trds. When prices are above MA you can go SHORT, when below you can go LONG.

NB the different averages used 20 and 50 days. This means the MA is following trend, so you would not be caught short when the trend is bullish for valid reasons but because price increases are recent, and with a small weighting of MA, you go SHORT. This is obviously a risk of using it, mitigated to a fair degree by the number of days choosen for the MA.

[bwalaman]

Interesting...a 7 minute lecture...

http://www.youtube.com/watch?v=MkpHu2f9gAU

[olusolakemmy]

hi specnomics,
i understand u got the definition from a source,
but it sound kind of complex to understand.
please can you explain further.
thanks for the effort

[Avocado]

"Moving average" is a fancy term. But it is a descriptive fancy term. If you can calculate an average (or, more correctly, an arithmetic average), Below, we provide an example relevant to trading:

1) Suppose that the closing prices of the Zenith for the last 10 trading days are:
day 1 = 50
day 2 = 55
day 3 = 59
day 4 = 52
day 5 = 54
day 6 = 55
day 7 = 57
day 8 = 60
day 9 = 59
day 10 = 62

We can calculate the 3-day moving average (fancy name: 3MA) by taking the prices 3 at a time and finding the simple average.

1st 3MA for days1, 2, 3 = (50+55+59)/3 = 54.67
2nd 3MA for days2, 3, 4 = (55+59+52)/3 = 55.33
The 3rd 3MA should give 55.00
4th 3MA = 53.67
5th 3MA = 55.33
6th 3MA = 57.33

and so on and so on. Now, you probably see why it is a "moving" average: it is an average, but it's moving with the prices you have.

You could compute 4MA (4-day moving average), or 5MA, or 6MA. Notice that if you decide to compute 6MA, you will only be able to compute 5 datapoints. These MAs are 'prior' MAs. There are other types of MAs. This type of MA is not the best to use (remember, MA is just a number; the important thing is what it means). If you have enough data, you could compute 20MA, or 50MA, or any xMA you want, where x is a positive number greater than 1. If you have an application like MS Excel, this takes less than a minute to fix, even if you have data for 10 or 20 years.

Hope that helps a little.
.