Moving Averages

In technical analysis, it is an average of a certain amount of data (usually the CLOSE are considered, but obviously HIGH, LOW or OPEN can also be used); the term mobile refers to the fact that only the last desired prices are considered: in a 20 period moving average, calculated on the CLOSE, the CLOSE of the last 20 bars will be taken into consideration.

By mediating prices, therefore, you can obtain a smooth line that makes it easier to see the trend. Many also tend to define them as curvilinear trendlines capable of defining valid areas of support and resistance (both static and dynamic). There are different types of moving averages that differ from each other simply in the calculation formula, thus generating signals that are more or less sensitive to changes in prices.

Exponential Moving Average (EMA)

This moving average is generated by a much more complex calculation system that always tries to eliminate the shortcomings of the simple moving average. A different weight is therefore given to the various prices, greater to the more recent and less to the older ones, in this way it tries to solve the problem of the reactivity of a moving average by introducing a system capable of assigning a proportionally higher value to the more data recent, assuming that the latter are the most significant and representative of the real evolution of prices. The result is a moving average that, for the same time domain, turns out to be more reactive than a simple moving average of the same length.

Double Exponential Moving Average and Triple Exponential Moving Average are also available

Moving Average Envelope

These are two moving averages plotted simultaneously on the chart, one higher and one lower. The Envelope defines the upper and lower limits of an asset’s trading range. When the financial instrument reaches the band the most, a sales signal is generated, while there is a purchase signal when the lower band is reached. The optimal percentage shifts according to the volatility of the financial instrument – the greater the volatility and the larger the percentage. Envelopes are calculated by moving the moving averages of any type. The type of medium chosen is moved up and down by a% at choice.

Simple Moving Average (SMA)

Also known as arithmetic, it remains the most used by analysts and is easier to calculate. The data of a given period are taken and the average is calculated by adding them together and dividing by the total number of values. However, this type of media is often criticized by many as it assigns the same importance to every single data: in a 100 period moving average, the last value has the same importance, 1% of “weight”, of the first value.

Time Series Moving Average (TSF)

This particular type of mobile media is often also called Time Series Forecast. Compared to a moving average it shows mainly two advantages: unlike an average, the Time Series Forecast does not show a big delay; in fact the indicator goes better as it is a line that combines points of a graph rather than an average of values, the Time Series line is therefore more reactive to price changes. As the name suggests, the indicator can then be used to predict the price of the coming periods. This estimate is based on the trend of the price of the underlying over a specific period of time (for example 14 periods). If the trend continues, the last point of the trendline (the value of the Time Series Forecast) is forecasting the price of the next period (for example the day after the calculation).

Triangular Moving Average (TMA)

The triangular moving average has the peculiarities, compared to other moving averages, of considering, giving greater importance, to the prices of the central portion of the selected period. This average is maintained, compared to the others, at a greater distance from the prices, assuming a characteristic sinuous course. However, this “harmonious wandering” can sometimes be profitable in trading.

Variable Moving Average (VMA)

It is an exponential moving average that levels itself automatically based on market volatility. The sensitivity of the variable moving average will therefore increase in function of the increase in volatility. A major flaw of moving averages in general is that they are unable to predict trend reversals and are not very reactive even after reversals. This particular type of moving average is an improvement due to the fact that it is leveled according to market conditions.

Volume Weighted Average Price (VWAP)

This indicator, notoriously used by institutional investors as a reference for the execution of large orders divided into several trades, is becoming much appreciated also by small traders. The Volume Weighted Average Price measures the weighted average price at which trades take place in a given period of time.

The calculated VWAP is then extended for its own standard deviations determining bands which are to be understood as supports and resistances, with particular attention to the second band. The median is painted green when the VWAP is raising, or red when the VWAP is declining.

The operational definition wants that in a trading day, strong hands buy on weakness (second band) and sell on the median (VWAP), the price of the asset will therefore be stationed between the bands. On a day of strong trend, however, the price will come out of the bands.

Indicator to be used with intraday timaframes.

Weighted Moving Average (WMA)

They have been designed to remedy the problem of simple moving averages regarding the weight to be assigned to the values taken into consideration. Its calculation provides that, taking into consideration a 10-period moving average, the value of the tenth day is multiplied by 10, that of the ninth day by nine, of the eighth day by eight, and so on. Doing so gives greater weight to the last values, the total will then be divided by the sum of the multiples.

Widya Moving Average (VIDYA)

The Vidya, is the moving average that adapts itself to the conditions of market volatility. This moving average is excellent especially when used as a support and resistance system, and crossovers are also quite reliable.

Welles Wilder Smoothing

Mobile media developed by Welles Wilder, is nothing more than a moving average calculated keeping a decreasing percentage of all the values present in the historical series. The use of this indicator is typical of a moving average.