Introduction to Moving Average
Moving average is a tool used by investors and traders in technical analysis, to evaluate the movement of the asset’s prices and trend direction of the securities. In a way the moving average is a tool that helps the investors and traders to keep in pace with the trends of the market.
It is called a moving average because the prices of assets vary every now and then and this average is calculated every time there is a change in the prices. Thus, it is continuously moving.
A moving average is nothing but an indicator that tells the analysts about the price trends in the market. The two basic uses of moving average are to determine the trend direction and determine the levels of support and resistance.
What are the types of Moving Averages?
The two types of moving averages that you need to be familiar with are— Simple Moving Average or SMA and Exponential Moving Average or EMA. Let’s take a brief look at both these moving averages separately.
Simple Moving Average or SMA
Simple Moving average or SMA is calculated by adding the recent data points in a particular set and dividing it by number of time periods. SMA is used as an indicator of when to enter or exit a market. Analysts also use SMA as an indicator to buy or sell securities.
Simple moving average or SMA is a backward looking tool because it relies on the data which is based on past prices for a specific period of time.
Exponential Moving Average or EMA
Exponential Moving Average or EMA is another type of moving average which focuses more on recent prices as opposed to Simple moving average or SMA that focuses on past prices. So, EMA is more responsive to recent prices.
Simple Moving Averages or SMA and Exponential Moving Averages or EMA are both technical indicators used for the same purpose but the key difference between the two is the sensitivity.
