ClearStation: Education

DJ30 11,502.50 89.63 0.78%

NASDAQ 2,382.45 20.48 0.86%

S&P 500 1,281.66 10.15 0.79%

US markets closed


		Symbol Search

Education

PDF Downloads

Join for Free

Logout

Customize

Help

Trending

Patterns

Mr. Tax
Man

Index

Glossary

Return to
Education

Moving Averages: A Definition by kensey

Previous	Next	List All	Return to Trending

	ClearStation uses 13-day and 50-day exponential moving averages (EMA). These are fairly standard values. The 13-day EMA is drawn in light green, and the 50-day EMA is drawn in pink.
	Avid Technology (AVID)	To define an exponential moving average (EMA), it will be helpful first to define a simple moving average (MA). A simple moving average shows the average price over the last n days: Simple MA = (P1 + P2 + ...... + Pn) / n where P = price The problem is that simple moving averages are "jumpy." They respond twice to each piece of data - once when it is added, and again when it drops off. Having the moving average change when a price is removed is a bad thing. When a high price is dropped, the MA will most likely tick down. When a low price is dropped, the MA would probably tick up even if the price went up that day, but by an amount smaller than the value that was dropped. As Elder says, "A simple moving average is like a guard dog that barks twice." The solution to the unreliability of this alarm is to use Exponential Moving Averages. An exponential moving average gives more weight to the latest data and responds faster to changes than does a simple MA. At the same time, EMA does not jump in response to old data being dropped off. Again, as Elder says, "This guard dog has better ears, and it only barks once when someone approaches the house." EMA = price today * K + EMA yest * (1-K) where K = 2 / (N+1)
	This is a continuous formula: each day the latest price is factored in, and old data fades towards oblivion, as it should. The older the data, the less importance is attached to it. Moving averages are useful in that they act as floors when prices are rising. You see how the price graph of AVID hugs the 13-day EMA the whole way up? If a price bar of AVID breaks through the 13-day EMA convincingly, this would suggest that continuation of the uptrend is somewhat in doubt. Next: Acting as a Floor Under Prices: ABT

Question? Get it answered! Comments? Talk to us! Copyright © 1998-2008 ClearStation. All rights reserved. Trademark Notice
Quotes delayed at least 20 minutes unless otherwise noted. ClearStation is a wholly-owned subsidiary of E*TRADE FINANCIAL Corp.