Moving average

In statistics, a moving average (rolling average or running average)

is a calculation to analyze data points by creating a series of averages
of different subsets of the full data set. It is also called a moving mean
(MM)[1] or rolling mean and is a type of finite impulse response
filter. Variations include: simple, cumulative, or weighted forms
(described below).

Given a series of numbers and a fixed subset size, the first element of
the moving average is obtained by taking the average of the initial
fixed subset of the number series. Then the subset is modified by An example of two moving average
"shifting forward"; that is, excluding the first number of the series and curves
including the next value in the subset.

A moving average is commonly used with time series data to smooth out short-term fluctuations and highlight
longer-term trends or cycles. The threshold between short-term and long-term depends on the application, and
the parameters of the moving average will be set accordingly. For example, it is often used in technical analysis
of financial data, like stock prices, returns or trading volumes. It is also used in economics to examine gross
domestic product, employment or other macroeconomic time series. Mathematically, a moving average is a
type of convolution and so it can be viewed as an example of a low-pass filter used in signal processing. When
used with non-time series data, a moving average filters higher frequency components without any specific
connection to time, although typically some kind of ordering is implied. Viewed simplistically it can be
regarded as smoothing the data.

Contents
Simple moving average (boxcar filter)
Cumulative moving average
Weighted moving average
Exponential moving average
Approximating the EMA with a limited number of terms
Relationship between SMA and EMA
Exponentially weighted moving variance and standard deviation
Modified moving average
Application to measuring computer performance
Other weightings
Moving median
Moving average regression model
See also
Notes and references
External links
Simple moving average (boxcar filter)
In financial applications a simple moving average (SMA) is the
unweighted mean of the previous data-points. However, in science
and engineering, the mean is normally taken from an equal number of
data on either side of a central value. This ensures that variations in
the mean are aligned with the variations in the data rather than being
shifted in time.An example of a simple equally weighted running
mean is the mean over the last entries of a data-set containing
entries. Let those data-points be . This could be closing
prices of a stock. The mean over the last data-points (days in this
example) is denoted as and calculated as:

When calculating the next mean with the same sampling width the range from to
is considered. A new value comes into the sum and the oldest value drops out. This
simplifies the calculations by reusing the previous mean .

This means that the moving average filter can be computed quite cheaply on real time data with a FIFO /
circular buffer and only 3 arithmetic steps.

During the initial filling of the FIFO / circular buffer the sampling window is equal to the data-set size thus
and the average calculation is performed as a cumulative moving average.

The period selected ( ) depends on the type of movement of interest, such as short, intermediate, or long-term.
In financial terms, moving-average levels can be interpreted as support in a falling market or resistance in a
rising market.

If the data used are not centered around the mean, a simple moving average lags behind the latest datum by
half the sample width. An SMA can also be disproportionately influenced by old data dropping out or new
data coming in. One characteristic of the SMA is that if the data have a periodic fluctuation, then applying an
SMA of that period will eliminate that variation (the average always containing one complete cycle). But a
perfectly regular cycle is rarely encountered.[2]
For a number of applications, it is advantageous to avoid the shifting induced by using only "past" data. Hence
a central moving average can be computed, using data equally spaced on either side of the point in the series
where the mean is calculated.[3] This requires using an odd number of points in the sample window.

A major drawback of the SMA is that it lets through a significant amount of the signal shorter than the window
length. Worse, it actually inverts it. This can lead to unexpected artifacts, such as peaks in the smoothed result
appearing where there were troughs in the data. It also leads to the result being less smooth than expected since
some of the higher frequencies are not properly removed.

Cumulative moving average

In a cumulative moving average (CMA), the data arrive in an ordered datum stream, and the user would like
to get the average of all of the data up until the current datum. For example, an investor may want the average
price of all of the stock transactions for a particular stock up until the current time. As each new transaction
occurs, the average price at the time of the transaction can be calculated for all of the transactions up to that
point using the cumulative average, typically an equally weighted average of the sequence of n values
up to the current time:

The brute-force method to calculate this would be to store all of the data and calculate the sum and divide by
the number of points every time a new datum arrived. However, it is possible to simply update cumulative
average as a new value, becomes available, using the formula

Thus the current cumulative average for a new datum is equal to the previous cumulative average, times n, plus
the latest datum, all divided by the number of points received so far, n+1. When all of the data arrive (n = N),
then the cumulative average will equal the final average. It is also possible to store a running total of the data as
well as the number of points and dividing the total by the number of points to get the CMA each time a new
datum arrives.

The derivation of the cumulative average formula is straightforward. Using

and similarly for n + 1, it is seen that

Solving this equation for results in

Weighted moving average
A weighted average is an average that has multiplying factors to give different weights to data at different
positions in the sample window. Mathematically, the weighted moving average is the convolution of the data
with a fixed weighting function. One application is removing pixelisation from a digital graphical image.

In technical analysis of financial data, a weighted moving average (WMA) has the specific meaning of
weights that decrease in arithmetical progression.[4] In an n-day WMA the latest day has weight n, the second
latest , etc., down to one.

The denominator is a triangle number equal to In the

more general case the denominator will always be the sum of the
individual weights.

When calculating the WMA across successive values, the difference

between the numerators of and is
. If we denote the sum
by , then
WMA weights n = 15

The graph at the right shows how the weights decrease, from highest weight for the most recent data, down to
zero. It can be compared to the weights in the exponential moving average which follows.

Exponential moving average

An exponential moving average (EMA), also known as an exponentially weighted moving average
(EWMA),[5] is a first-order infinite impulse response filter that applies weighting factors which decrease
exponentially. The weighting for each older datum decreases exponentially, never reaching zero. The graph at
right shows an example of the weight decrease.
The EMA for a series may be calculated recursively:

Where:

The coefficient represents the degree of weighting

decrease, a constant smoothing factor between 0 and 1. A
higher discounts older observations faster.
EMA weights N = 15
is the value at a time period .
is the value of the EMA at any time period .

S1 may be initialized in a number of different ways, most commonly by setting S1 to Y1 as shown above,
though other techniques exist, such as setting S1 to an average of the first 4 or 5 observations. The importance
of the S1 initialisations effect on the resultant moving average depends on ; smaller values make the choice
of S1 relatively more important than larger values, since a higher discounts older observations faster.

Whatever is done for S1 it assumes something about values prior to the available data and is necessarily in
error. In view of this, the early results should be regarded as unreliable until the iterations have had time to
converge. This is sometimes called a 'spin-up' interval. One way to assess when it can be regarded as reliable is
to consider the required accuracy of the result. For example, if 3% accuracy is required, initialising with Y1 and
taking data after five time constants (defined above) will ensure that the calculation has converged to within
3% (only <3% of Y1 will remain in the result). Sometimes with very small alpha, this can mean little of the
result is useful. This is analogous to the problem of using a convolution filter (such as a weighted average)
with a very long window.

This formulation is according to Hunter (1986).[6] By repeated application of this formula for different times,
we can eventually write St as a weighted sum of the datum points , as:

for any suitable k ∈ {0, 1, 2, ...} The weight of the general datum is .

This formula can also be expressed in technical analysis terms as follows, showing how the EMA steps
towards the latest datum, but only by a proportion of the difference (each time):

Expanding out each time results in the following power series, showing how the weighting
factor on each datum p1 , p2 , etc., decreases exponentially:

where

is
is
 and so on

since .

It can also be calculated recursively without introducing the error when initializing the first estimate (n starts
from 1):

Assume

This is an infinite sum with decreasing terms.

Approximating the EMA with a limited number of terms

The question of how far back to go for an initial value depends, in the worst case, on the data. Large price
values in old data will affect the total even if their weighting is very small. If prices have small variations then
just the weighting can be considered. The power formula above gives a starting value for a particular day, after
which the successive days formula shown first can be applied. The weight omitted by stopping after k terms is

which is

i.e. a fraction

[7]

out of the total weight.

For example, to have 99.9% of the weight, set above ratio equal to 0.1% and solve for k:
to determine how many terms should be used. Since as , we know approaches
as N increases .[8] This gives:

When is related to N as , this simplifies to approximately[9]

for this example (99.9% weight).

Relationship between SMA and EMA

Note that there is no "accepted" value that should be chosen for , although there are some recommended
values based on the application. A commonly used value for is . This is because the
weights of an SMA and EMA have the same "center of mass" when .

[Proof]

The weights of an -day SMA have a "center of mass" on the day, where

(or , if we use zero-based indexing)

For the remainder of this proof we will use one-based indexing.

Now meanwhile, the weights of an EMA have center of mass

That is,

We also know the Maclaurin Series

Taking derivatives of both sides with respect to gives:

or

Substituting , we get

or

So the value of that sets is, in fact:

or

And so is the value of that creates an EMA whose weights have the same center of gravity as
would the equivalent N-day SMA

This is also why sometimes an EMA is referred to as an N-day EMA. Despite the name suggesting there are N
periods, the terminology only specifies the α factor. N is not a stopping point for the calculation in the way it is
in an SMA or WMA. For sufficiently large N, the first N datum points in an EMA represent about 86% of the
total weight in the calculation when :

[Proof]

The sum of the weights of all the terms (i.e., infinite number of terms) in an exponential moving average is 1.
The sum of the weights of terms is . Both of these sums can be derived by using the
formula for the sum of a geometric series. The weight omitted after terms is given by subtracting this from
1, and you get (this is essentially the formula given previously for
the weight omitted).
We now substitute the commonly used value for in the formula for the weight of terms.
If you make this substitution, and you make use of[10] , then you get

[11]

i.e. simplified,[12] tends to .

the 0.8647 approximation. Intuitively, what this is telling us is that the weight after terms of an `` -
period" exponential moving average converges to 0.8647.

The designation of is not a requirement. (For example, a similar proof could be used to just
as easily determine that the EMA with a half-life of N-days is or that the EMA with the same
median as an N-day SMA is ). In fact, 2/(N+1) is merely a common convention to form
an intuitive understanding of the relationship between EMAs and SMAs, for industries where both are
commonly used together on the same datasets. In reality, an EMA with any value of can be used, and can be
named either by stating the value of , or with the more familiar N-day EMA terminology letting
.

Exponentially weighted moving variance and standard deviation

In addition to the mean, we may also be interested in the variance and in the standard deviation to evaluate the
statistical significance of a deviation from the mean.

EWMVar can be computed easily along with the moving average. The starting values are and
, and we then compute the subsequent values using:[13]

From this, the exponentially weighted moving standard deviation can be computed as
. We can then use the standard score to normalize data with respect to the moving average and variance. This
algorithm is based on Welford's algorithm for computing the variance.

Modified moving average

A modified moving average (MMA), running moving average (RMA), or smoothed moving average
(SMMA) is defined as:

In short, this is an exponential moving average, with . The only difference between EMA and
SMMA/RMA/MMA is how is computed from . For EMA the customary choice is
Application to measuring computer performance

Some computer performance metrics, e.g. the average process queue length, or the average CPU utilization,
use a form of exponential moving average.

Here α is defined as a function of time between two readings. An example of a coefficient giving bigger
weight to the current reading, and smaller weight to the older readings is

where exp() is the exponential function, time for readings tn is expressed in seconds, and W is the period of
time in minutes over which the reading is said to be averaged (the mean lifetime of each reading in the
average). Given the above definition of α, the moving average can be expressed as

For example, a 15-minute average L of a process queue length Q, measured every 5 seconds (time difference is
5 seconds), is computed as

Other weightings
Other weighting systems are used occasionally – for example, in share trading a volume weighting will
weight each time period in proportion to its trading volume.

A further weighting, used by actuaries, is Spencer's 15-Point Moving Average[14] (a central moving average).
Its symmetric weight coefficients are [−3, −6, −5, 3, 21, 46, 67, 74, 67, 46, 21, 3, −5, −6, −3], which factors as
[1, 1, 1, 1]*[1, 1, 1, 1]*[1, 1, 1, 1, 1]*[−3, 3, 4, 3, −3]/320 and leaves samples of any cubic polynomial
unchanged.[15]

Outside the world of finance, weighted running means have many forms and applications. Each weighting
function or "kernel" has its own characteristics. In engineering and science the frequency and phase response
of the filter is often of primary importance in understanding the desired and undesired distortions that a
particular filter will apply to the data.

A mean does not just "smooth" the data. A mean is a form of low-pass filter. The effects of the particular filter
used should be understood in order to make an appropriate choice. On this point, the French version of this
article discusses the spectral effects of 3 kinds of means (cumulative, exponential, Gaussian).

Moving median
From a statistical point of view, the moving average, when used to estimate the underlying trend in a time
series, is susceptible to rare events such as rapid shocks or other anomalies. A more robust estimate of the trend
is the simple moving median over n time points:

where the median is found by, for example, sorting the values inside the brackets and finding the value in the
middle. For larger values of n, the median can be efficiently computed by updating an indexable skiplist.[16]

Statistically, the moving average is optimal for recovering the underlying trend of the time series when the
fluctuations about the trend are normally distributed. However, the normal distribution does not place high
probability on very large deviations from the trend which explains why such deviations will have a
disproportionately large effect on the trend estimate. It can be shown that if the fluctuations are instead
assumed to be Laplace distributed, then the moving median is statistically optimal.[17] For a given variance, the
Laplace distribution places higher probability on rare events than does the normal, which explains why the
moving median tolerates shocks better than the moving mean.

When the simple moving median above is central, the smoothing is identical to the median filter which has
applications in, for example, image signal processing.

Moving average regression model

In a moving average regression model, a variable of interest is assumed to be a weighted moving average of
unobserved independent error terms; the weights in the moving average are parameters to be estimated.

Those two concepts are often confused due to their name, but while they share many similarities, they
represent distinct methods and are used in very different contexts.

See also
Exponential smoothing
Moving average convergence/divergence indicator
Window function
Moving average crossover
Rising moving average
Rolling hash
Running total
Local regression (LOESS and LOWESS)
Kernel smoothing
Moving least squares
Zero lag exponential moving average

Notes and references

1. Hydrologic Variability of the Cosumnes River Floodplain (http://www.waterboards.ca.gov/waterr
ights/water_issues/programs/bay_delta/docs/cmnt091412/sldmwa/booth_et_al_2006.pdf)
(Booth et al., San Francisco Estuary and Watershed Science, Volume 4, Issue 2, 2006)
2. Statistical Analysis, Ya-lun Chou, Holt International, 1975, ISBN 0-03-089422-0, section 17.9.
3. The derivation and properties of the simple central moving average are given in full at
Savitzky–Golay filter.
 4. "Weighted Moving Averages: The Basics" (http://www.investopedia.com/articles/technical/0604
01.asp). Investopedia.
5. "Archived copy" (https://web.archive.org/web/20100329135531/http://lorien.ncl.ac.uk/ming/filter/
filewma.htm). Archived from the original (http://lorien.ncl.ac.uk/ming/filter/filewma.htm) on 2010-
03-29. Retrieved 2010-10-26.
6. NIST/SEMATECH e-Handbook of Statistical Methods: Single Exponential Smoothing (http://w
ww.itl.nist.gov/div898/handbook/pmc/section4/pmc431.htm) at the National Institute of
Standards and Technology
7. The Maclaurin Series for is
8. It means , and the Taylor series of approaches .
9. loge(0.001) / 2 = −3.45
10. See the following link (http://options-trading-notes.blogspot.com/2013/06/derivation-of-ea.html)
for a proof.
11. The denominator on the left-hand side should be unity, and the numerator will become the right-

hand side (geometric series), .

12. Because (1 + x/n)n tends to the limit ex for large n.

13. Finch, Tony. "Incremental calculation of weighted mean and variance" (https://fanf2.user.srcf.ne
t/hermes/doc/antiforgery/stats.pdf) (PDF). University of Cambridge. Retrieved 19 December
2019.
14. Spencer's 15-Point Moving Average — from Wolfram MathWorld (http://mathworld.wolfram.co
m/Spencers15-PointMovingAverage.html)
15. Rob J Hyndman. "Moving averages (https://robjhyndman.com/papers/movingaverage.pdf)".
2009-11-08. Accessed 2020-08-20.
16. "Efficient Running Median using an Indexable Skiplist « Python recipes « ActiveState Code" (ht
tp://code.activestate.com/recipes/576930/).
17. G.R. Arce, "Nonlinear Signal Processing: A Statistical Approach", Wiley:New Jersey, USA,
2005.

External links

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