TRADING

DAY TRADING

AN INTRODUCTION TO DAY TRADING

Simple, Exponential, and Weighted Moving

Averages
Day Trading Uses and Applications of Moving Averages

•••

BY
ADAM MILTON
Updated October 20, 2021
REVIEWED BY
ERIKA RASURE
FACT CHECKED BY
EMILY ERNSBERGER

Moving averages act as technical indicators that show the average price movement over a certain
period. They are often used to help highlight trends, spot trend reversals, and provide trade signals.

There are several different types of moving averages. They each create a line on a chart that can help
show you which direction a price is moving.

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Learn the different types of averages used by traders and what they tell you about a price.

Simple Moving Average Calculation

The simple moving average (SMA) calculates an average of the last n prices, where Px represents the

price in a period, and n represents the number of periods. The average "moves" because you are not
using all of the data, only recent periods:

For example, a four-period SMA with prices of 1.2640, 1.2641, 1.2642, and 1.2641 gives a moving
average of 1.2641 using the calculation (1.2640 + 1.2641 + 1.2642 + 1.2641) / 4 = 1.2641.

While knowing how to calculate a simple average is a good skill to have, trading and chart platforms
figure it out for you. You select the SMA indicator from the list of charting indicators and apply it to
the chart. Then you adjust the number of periods you want to use.

You typically make adjustments to the indicators in the Settings menu section of a trading platform.

Tip: On many platforms, you can locate the settings by double-clicking on the indicator
itself.

The advantage of an SMA is that you know what you are getting. The SMA value equals the average
price for the number of periods in the SMA calculation.

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Traders commonly used eight, 20, 50, 100, and 200 periods for an SMA. For example, if using a 100-
period SMA, the current value of the SMA on the chart is the average price over the last 100 periods
or price bars.

Some charts include the SMA, along with an exponential moving average (EMA). They can also have
a weighted moving average (WMA) on a one-minute stock chart. Due to their different calculations,
the indicators appear at different price levels on the chart.

Exponential Moving Average Calculation

The exponential moving average (EMA) is a weighted average of recent period's prices. It uses an
exponentially decreasing weight from each previous price/period. In other words, the formula gives
recent prices more weight than past prices.

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For example, a four-period EMA has prices of 1.5554, 1.5555, 1.5558, and 1.5560. The last value is
the most recent and gives a current EMA value of 1.5558.

The EMA adapts more quickly to price changes than the SMA does. For example, when a price
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reverses direction, the EMA will reverse direction more quickly than the SMA will, because the EMA
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formula gives more weight to recent prices and less weight to prices from the past.
 Tip: As with the SMA, charting platforms do all of the EMA calculations for you. Select the
EMA from the indicator list on a charting platform, and apply it to your chart. Go into the
settings, and adjust how many periods the indicator should calculate, such as 15, 50, or
100.

Weighted Moving Average Calculation

The weighted moving average (WMA) gives you a weighted average of recent prices, where the
weighting decreases with each previous price. This works similarly to the EMA, but you calculate the
WMA differently.

WMAs can have different weights assigned based on the number of periods used in the calculation. If
you want a weighted moving average of four different prices, then the most recent weighting could be
4 to 10. The previous period could weigh 3 to 10. The third period could have a weighting of 2 to 10.

A weight of 4 to 10, for example, means that you have 10 recent periods and their prices. You choose
the four most recent prices. This accounts for 40% of the value of the WMA. The price four periods
ago only accounts for 10% of the WMA value.

For the following example, assume prices of 90, 89, 88, 89, with the most recent price first. You would
calculate this as [90 x (4/10)] + [89 x (3/10)] + [88 x (2/10)] + [89 x (1/10)] = 36 + 26.7 + 17.6 + 8.9 =
89.2

Tip: You can customize the weighted moving average more than the SMA and EMA. The
most recent price points are usually given more weight. It could also work the other way,
where you give historical prices more weight.

Moving Average Trading Uses and Interpretation

You can use moving averages for both analysis and trading signals. For analysis, all of the moving
averages help highlight the trend. When the price is above its moving average, it shows that the price Ad
is trading higher than it has, on INSTALL
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uptrend. When the price sits below its moving average, the price is trading lower on average than it
has over the period being analyzed. That helps to confirm a downtrend.

When the price crosses above its moving average, it is getting stronger relative to where it was in the
past, because the most recent price now sits higher than the average. If the price crosses below its
moving average, it is getting weaker relative to where it was in the past.

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One longer-term and one shorter-term moving average—for example, 20 and 50 periods—can be
added to a chart simultaneously. When the 20-period moving average crosses above the 50 line, it
indicates that short-term price momentum is moving to the upside. When the 20-period moving
average crosses below the 50 line, it suggests that the short-term price momentum is moving to the
downside.

Note: Moving averages can also be incorporated with other indicators to provide trade
signals.

An EMA can provide buy signals when combined with Keltner Channels, an indicator with a high,
average, and low price that creates a "channel" on a chart. A strategy may include buying near the
EMA when the trend is up, and the price is pulling back from the top of the Keltner Channel.

One type of moving average isn't inherently better than others; they calculate the average price
differently. Depending on the strategy you’re using, one kind of moving average may work better than
another. Try out different moving average combinations, and see which provides you with the best Ad

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You may find that, for each market, you need to adjust your settings slightly. A 50-period SMA may
provide great signals on one stock, for example, but not on another. A 20-period EMA may help isolate
the trend on one futures contract but not another. All of the moving averages are just tools, and
interpreting them is up to the trader, because no indicator works well all the time or in all market
conditions.

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Frequently Asked Questions (FAQs)

How do you add moving average to a chart?

Moving averages are a technical indicator, so look for the button that lets you add indicators. This
may be in a settings menu, or it may be its own button. From there, you can choose between simple,
exponential, and weighted moving averages. Once the moving average is added to the chart, you can
alter the number of periods, whether it uses the close or the low of the day, and other factors along
these lines.

How should you format moving averages for swing trading?

Swing traders often use a mix of short-term and mid-term moving averages. For instance, a trader
may use an 8-day, 24-day, and 50-day moving average. Other traders may use a 6-month moving
average or more, in addition to a shorter-term moving average.

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PART OF
An Introduction to Day Trading

What You Need to Know What Is Day Trading? Day Trad

About Day Trading Trading

1 of 31 2 of 31 3 of 31

INVESTING
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 INVESTING

What Is Volume-Weighted Average

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Pricing?
How to Trade Penny Stocks Using
Trading Charts

DAY TRADING
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What Is Technical Analysis? Your Trading Strategy

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