From the September 2013 issue of Futures Magazine • Subscribe!

Stocks, moving averages and how to leverage them

The moving average is one of the classic and most-reliable tools for technical analysis. A moving average simply shows the average value of a security’s price over a defined period of time. The direction of the average reflects the general trend of the security.

Although the moving average is one of the simplest technical indicators, there are variations in its calculation. For example, the moving average calculation can be based on a security’s open, high, low, close, volume or even another indicator. In addition, it can be calculated over different time periods. The longer the time period, the smoother the average. The shorter the time period, the more reactive the average.

There also are variations in the process used to calculate the average. Two of the most popular methods are the simple moving average (SMA) and the exponential moving average (EMA).

The only significant difference between the EMA and SMA is the weight assigned to the most recent data. The SMA applies equal weight to all prices in the range; the EMA applies more weight to recent prices. “Two averages” (below) shows a 20-day SMA in red and the equivalent of a 50-day EMA in blue applied to daily data of the Market Vectors Gold Miner (GDX) exchange-traded fund (ETF).

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