Moving averages are used to pinpoint trade areas, to identify trends, and to analyze markets. Moving averages help traders isolate the trend in a security, or the lack of one, and can also signal when a trend may be reversing. Two of the most common types are simple and exponential. We will look at the differences between these two moving averages.
Simple Moving Average
To calculate a 10-day simple moving average (SMA), add the closing prices of the last 10 days and divide by 10. To calculate a 20-day moving average, add the closing prices over a 20-day period and divide by 20.
For example, given the following series of prices:
$10, $11, $11, $12, $14, $15, $17, $19, $20, $21
The SMA calculation would look like this:
$10+$11+$11+$12+$14+$15+$17+$19+$20+$21 = $150
10-day period SMA = $150/10 = $15
Exponential Moving Average
The exponential moving average (EMA) focuses more on recent prices than on a long series of data points, as the simple moving average required.
The most important factor is the smoothing constant that = 2/(1+N) where N = the number of days.
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