Moving Averages and the Main Technical Indicators

3.1Types of Moving Average and Their Periods

A moving average recalculates the mean of the last N closes each day and joins the results into a line. The basic form is the simple moving average (SMA), which weights every period equally; the exponential moving average (EMA), which gives more weight to recent prices, is also widely used. An EMA reacts to price changes faster than an SMA, but also reacts more to small swings.

Period choices follow convention. Japanese daily charts commonly show 5, 25 and 75 days, and weekly charts 13, 26 and 52 weeks. In the US, 20, 50 and 200 days are widely used, and the 200-day moving average in particular is said to be referenced by many market participants as a gauge of the long-term trend.

The slope of a moving average is read as the trend's direction, and the price's position relative to it as short-term momentum. A price above a rising moving average suggests the advance still has momentum; a price below a falling one suggests the decline still has momentum.

Bear in mind that a moving average is an average of past prices, so it always moves after the price — it is a lagging indicator. It tends to help in trending markets, but in sideways markets the price crosses it back and forth, which makes it hard to read.

• SMA: averages closes over the period with equal weights
• EMA: weights recent prices more and reacts faster
• 5, 25 and 75 days are common in Japan; 20, 50 and 200 days in the US
• Moving averages lag and work poorly in sideways markets