# Combining smas and emas

To identify the overall trend, moving averages can be very helpful. The moving averages show the average price of a currency at a specific point over a specific period of time. Moving averages are not perfect. To counteract this issue, it is best to use a short period of time when using moving averages. This makes it more reflective of the recent price action than it would be if you use a longer period. However, the moving averages of short periods are subject to more false trend-change alerts.

As an alternate, the trader can use the moving averages by combining two averages of different periods. When the shorter-term average crosses over the longer-term average, buy signals are usually detected. Likewise, sell signals are detected when the shorter-term average falls below the longer-term average. Mathematically distinct moving averages have three main types: SMAs give equal importance to all of the data in the period. Indicators and oscillators vary greatly in both their derivation and their usage.

The indicators, which can be found right on the candles or price bars, include moving averages, Parabolic SAR, Bollinger Bands and much more. These indicators are usually lagging, providing a historical view of the price action.

The indicators can often confirm or provide clues as to the direction of present momentum and past trends. On the other hand, the oscillators are generally shown separately above or below the price bars.

Like the indicators, the oscillators are also lagging. The oscillators are good at revealing oversold and overbought conditions. Because of this, the oscillators are most useful for traders who would like to identify ranging circumstances, rather than trending circumstances.

Other technical drawing tools are, like analysis tools, popular and also varied. Many of these analyses are used to reveal areas of importance, such as the support and resistance levels. The most basic drawing tools are the trend lines, regardless of whether they are diagonal or horizontal. Because prices are averaged, the daily fluctuations are dampened into a smoother line that better represents the current trend. The strength of the trend is indicated by the slope of the moving average, especially longer-term moving averages.

Moving averages are also used in other technical indicators, such as Bollinger Bands, envelopes, and directional movement indicators.

A simple moving average SMA is simply the average of prices of a security or index over a specific time span, such as 5, 10, 20, or 50 days. They are called moving averages because they are calculated for each trading day for the previous period, so at the end of a trading day, the last day is added, while the earliest day of the previous average is dropped. Most moving averages are based on closing prices, but they can be based on opening, high, low, or mean prices.

Whichever price is chosen must be used consistently to give the best indication of trend. For example, to calculate a day simple moving average, which can be denoted as SMA 10 , based on closing prices, the closing prices of the last 10 days are added, then divided by After the next trading day, the earliest day of the previous average is replaced by the latest day. Since a simple moving average is only an average where the last value is added and the first value is dropped for each day, a simple moving average can also be calculated using a spreadsheet's AVERAGE function.

Thus, with Microsoft Excel, this moving average can be calculated thus:. The input variables to the AVERAGE function can be references to cells with imported stock prices, which makes their calculation even easier. Because moving averages are based on data in a preceding period, they are lagging indicators. They can only indicate a trend that is already in place.

Moving averages based on shorter time spans more closely reflect the underlying current trend, but they are also more sensitive to the volatility of the markets, which can generate many false signals. To minimize false signals, especially in a whipsaw market that trades within a narrow range, multiple moving averages of different time spans are used together.

Traders often use crossovers , where the graph of the shorter moving average crosses over a longer moving average, as a good indication of a new trend. Traders will often use the crossovers as a buy or sell signal and as a good price to set trailing stops. So if the shorter moving average crosses above the longer-term average, then this indicates a beginning of an uptrend, while a downward cross may indicate the beginning of a downtrend.

However, even crossovers may give false signals, particularly in whipsaw markets, so moving averages are often used with other technical indicators as a confirmation of the trend change. The problem with simple moving averages is that the earliest day of the time period has the same weight in the average as the most recent day. If the earliest day was volatile, but the market has recently calmed, then the volatile day will have a large influence on the average—known as a drop-off effect —which would not best represent the current market.

To correct this anomaly, exponential moving averages EMA are used, where greater weight is given to more recent prices. This greater weight causes the EMA to follow the underlying prices more closely most of the time than the SMA of the same duration. Although moving averages can be calculated in many different ways, the traditional method of calculating the EMA is to add an additional day to the simple moving average, but to give greater weight to the last day.

The formula to calculate the weight of the last day is:. So if XYZ stock had a day moving average of 25 yesterday , and the stock closed at 26 today, then:. There are many variations of the exponential moving average. Many of these variations base their calculations of the EMA on the volatility of the market. Moving averages can easily be calculated using a spreadsheet or the software of a trading platform.

Most major websites that provide stock prices, such as Yahoo , Google , and Bloomberg , also provide free charting tools that include moving averages.