The moving averages are lagging indicators (MA) that most traders both professional and novice, will have probably used at one time or another.
Although there are a number of MA indicators, the most common used are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).
In this article, we will focus on these two indicators which traders use as technical indicators to forecast market trend movements to make their decision in trading.
These moving averages will help identify:
1. Direction of a trend
2. Potential support and resistance levels.
The Simple Moving Average (SMA)
The SMA is an indicator used as a common indicator for trading. It is calculated by taking the closing price of the asset and adding it with a number of time periods, and then dividing it by the total of number of the time periods.
For example, let's say the last 5 days closing prices for Kuala Lumpur Index Futures (FKLI) are 1300, 1450, 1250, 1500 and 1550.
Thus, the 5-day SMA for FKLI is calculated as follows:
1300 + 1450 + 1250 + 1500 + 1550 / 5 = 1410
The way of looking at SMA is straight forward. If the simple moving average line is on an upward trend, it indicates a strong momentum of an upward trend.
If the SMA line is on a downward trend, it indicates a strong momentum downwards.
If the SMA line is neither up nor down, it indicates a weak momentum where the market is stagnant.
The momentum also builds if the shorter term SMA crosses over the longer term SMA.
The SMA can also be used as a support on an upward trend and also a resistance on a downward trend.
The con of using the SMA is that some regard it as a lagging indicator since it does not weight recent price movements. Thus some traders prefer to use the exponential moving average (EMA) which will be discussed below.
Exponential Moving Average (EMA)
The EMA is similar to the SMA just that more weight is given to the data. In this manner, the average is weighted to place emphasis on the most recent price action.
This is the reason why many traders prefer to use this indicator because of its ability to reduce lag between EMA crosses.
The EMA is read exactly like the SMA price movement where the upward trend of the EMA line indicates a strong upward trend momentum and vice versa.
Simple Moving Average (SMA) versus Exponential Moving Average (EMA)
There are distinct differences between these two indicators as discussed above and both of them have different functions as indicators.
Because the EMA has less lag, traders prefer to use this as a trend indicator.
However for SMA, it represents the true average for the entire time period. Thus, the SMA may be more suited to identify support and resistance levels.
Sheim Quah writes for Oriental Pacific Futures, a Malaysia-based brokerage authorized to provide futures broking services to institution and private clients since 2007. OPF specializes in futures broking, particularly Crude Palm Oil Futures (FCPO) traded on Bursa Malaysia Derivatives. Head on to this futures broker website for more information.
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Oriental Pacific Futures articles written and published by Sheim Quah may be reprinted, reposted or distributed free for educational purposes only on the condition that Oriental Pacific Futures, Sheim Quah and the Corporate Website link information ( http://www.opf.com.my ) are included. However, other organizations are invited to link to articles that are available in the public area of the Oriental Pacific Futures' Learning Resources website. No additional permission is needed for such a link.
Article Source: http://EzineArticles.com/?expert=Sheim_Quah
Article Source: http://EzineArticles.com/6166074
Although there are a number of MA indicators, the most common used are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).
In this article, we will focus on these two indicators which traders use as technical indicators to forecast market trend movements to make their decision in trading.
These moving averages will help identify:
1. Direction of a trend
2. Potential support and resistance levels.
The Simple Moving Average (SMA)
The SMA is an indicator used as a common indicator for trading. It is calculated by taking the closing price of the asset and adding it with a number of time periods, and then dividing it by the total of number of the time periods.
For example, let's say the last 5 days closing prices for Kuala Lumpur Index Futures (FKLI) are 1300, 1450, 1250, 1500 and 1550.
Thus, the 5-day SMA for FKLI is calculated as follows:
1300 + 1450 + 1250 + 1500 + 1550 / 5 = 1410
The way of looking at SMA is straight forward. If the simple moving average line is on an upward trend, it indicates a strong momentum of an upward trend.
If the SMA line is on a downward trend, it indicates a strong momentum downwards.
If the SMA line is neither up nor down, it indicates a weak momentum where the market is stagnant.
The momentum also builds if the shorter term SMA crosses over the longer term SMA.
The SMA can also be used as a support on an upward trend and also a resistance on a downward trend.
The con of using the SMA is that some regard it as a lagging indicator since it does not weight recent price movements. Thus some traders prefer to use the exponential moving average (EMA) which will be discussed below.
Exponential Moving Average (EMA)
The EMA is similar to the SMA just that more weight is given to the data. In this manner, the average is weighted to place emphasis on the most recent price action.
This is the reason why many traders prefer to use this indicator because of its ability to reduce lag between EMA crosses.
The EMA is read exactly like the SMA price movement where the upward trend of the EMA line indicates a strong upward trend momentum and vice versa.
Simple Moving Average (SMA) versus Exponential Moving Average (EMA)
There are distinct differences between these two indicators as discussed above and both of them have different functions as indicators.
Because the EMA has less lag, traders prefer to use this as a trend indicator.
However for SMA, it represents the true average for the entire time period. Thus, the SMA may be more suited to identify support and resistance levels.
Sheim Quah writes for Oriental Pacific Futures, a Malaysia-based brokerage authorized to provide futures broking services to institution and private clients since 2007. OPF specializes in futures broking, particularly Crude Palm Oil Futures (FCPO) traded on Bursa Malaysia Derivatives. Head on to this futures broker website for more information.
###
Oriental Pacific Futures articles written and published by Sheim Quah may be reprinted, reposted or distributed free for educational purposes only on the condition that Oriental Pacific Futures, Sheim Quah and the Corporate Website link information ( http://www.opf.com.my ) are included. However, other organizations are invited to link to articles that are available in the public area of the Oriental Pacific Futures' Learning Resources website. No additional permission is needed for such a link.
Article Source: http://EzineArticles.com/?expert=Sheim_Quah
Article Source: http://EzineArticles.com/6166074
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