Moving Average

Moving averages are most widely used in technical analysis. There are different types of moving averages. The most commonly used are simple moving average (SMA) and exponential moving average (EMA).

SMA is simply the sum of all the prices during the period of study divided by the number of periods. Calculation of EMA is a bit more complicated.

EMA(current) = EMA(previous) + Smoothing Factor x (Price – EMA(previous)

Smoothing Factor = 2 / (1+n) where n = number of sample.

The general understanding is that EMA removes the time lag inherent in moving average indicator as it places more weight to the most recent price.

So which type of moving average is better? There is no “best” indicator in the field of technical analysis. The type of indicator to use depends on the trading system being adopted as well as the character and mentality of the trader that is using the indicator.

Moving average can be used to determine the short term, intermediate term and long term bias of the market. Commonly used time periods are given below:

20 day moving average	Short term
50 day moving average	Intermediate term
200 day moving average	Long term

This blog captures the movement of stocks in the Malaysia Stock Exchange based on whether it crossed above or below the 50 and 200 day moving average. Stock that closed below its 50 day moving average and is unable to rise above it for the next few trading sessions indicates weakness in the stock in the intermediate term and vice versa.