Forecasting Prices By using Moving Average Formulas

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The day trading instrument used by a day trader to investigate the price activity of securities is called a moving average formula. There are four types of moving average formula and these are the simple moving average, exponential moving average, smoothed moving average and linear weighted moving average. A moving average formula is utilized in day trading to smooth out ever-changing movements of prices. The simple and exponential moving average are the 2 types most frequently used.

The simple moving average or SMA is just the mean of a set of data in a certain period of time. The simple moving average is determined by adding up the costs of a certain security at a selected time frame selected and dividing the total to the number of periods used. Clearly,SMA makes use of simple arithmetic.

An example would be:

10-hour period:

Time Period - 1st hr 2nd 3rd 4th 5th 6th 7th 8th 9th 10th hr

Price of Stocks - $3 $5 $8 $7 $10 $4.5 $8.43 $4.5 $3.75 $5

These rates, if plotted on a chart, would most likely create razor-sharp fluctuations. To smooth out these fluctuations and provide the day trader an inkling of the likely future stock prices, he makes use of the simple moving average.

To compute the Simple Moving Average:

• $3 + $5 + $8 + $7 + $10 + $4.5 + $8.43 + $4.5 + $3.75 + $5 = $59.18 (sum)

• $59.18 is then divided by 10 (number of periods used) = $5.918 (SMA)

When a recently available cost is being added in, the earliest cost is dumped and the simple procedure is repeated. We now have here an SMA duration of 10 hrs. The longer the time scale, the more often it lags behind the cost.

Old and latest data are given the exact same weight in simple moving average. EMA, however, shows more significance to the new data than the old ones. The EMA places more relevance on the latest day trading activities as a result it can offer day traders far better day trading signs. One downside in working with EMA is that there is an higher probability of finding false buying signals. To achieve balance, day traders use together EMA along with SMA in day trading.

There are other moving averages and to read more about these, check out a day trading blog. In a day trading blog, you will see that each has its own method, benefits and drawbacks in day trading.
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John Smith has 1 articles online

More information about the moving average formula can be read on this day trading website.

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Forecasting Prices By using Moving Average Formulas

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This article was published on 2012/03/18