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These averages, which are very similar to the ones we use every day, are used to identify trends. It is a popular technical indicator that can be used to predict the direction of a trend in stock analysis. There are two types of Moving Averages: the simple and the exponential. Simple and exponential are identical, except that exponential adds weight to the most recent data. An exponential average is more accurate in forecasting market changes.
How do you calculate simple moving averages?
Let's say you want to calculate SBI's simple closing price for the last five days.
Day SBI Closing Prices
1 300
2 280
3 320
4 325
5 320
The average is = 1545/5= 309.
The SBI price has moved to 325 on the sixth day. What is the average moving price for the last five days? You will need to subtract the value of day 1, and then add the price for day 6.
Let's say that SBI rises to 320 on 7 days. What is the average moving price for the last five days? The average is calculated by subtracting the values of day 1 and 2 and adding the price for day 6 or 7.
Day
SBI Closing Prices
Average for the last 5 days
1
300
2
280
3
320
4
325
5
320
309 (Day 1-5)
6
325
314 (Day 2-6)
7
320
322 (Day 3-7)
8
310
Day 4-8) 320
9
315
318 (Day 5-9)
10
325
319 (Day 6-10)
The moving average is the series of values that you see in the last 5-day average column. It changes with every passing day.
How do you calculate the exponential moving mean (EMA)?
As-
Exponential Moving Average = (Closing price -EMA (previous day)) * (2/(Time period+1) + EMA (previous day)
Day
SBI Closing Prices
Last 5-day Exponential Average
1
300
2
280
3
320
4
325
5
320
91.43
6
325
158.16
7
320
204.40
8
310
234.57
9
315
257.55
10
325
276.82
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