Types of Stock Index Moving Averages - SMA, EMA, LWMA & SMMA
There are 4 types of Stock Index moving averages:
- Simple moving average
- Exponential Indices moving average
- Smoothed Stock Indices moving average
- Linear weighted Stock Indices moving average
The difference between these 4 moving averages is the weight assigned in to the most recent price data.
Simple Moving Average - SMA Indicator
Stock Index SMA indicator applies equal weight to the Stock Indices data used to calculate the simple moving average and is calculated by summing up the price periods of a Stock Indices chart & this value is then divided by the number of such price periods. For example simple moving average 10, adds the price data for the last 10 price periods and divides them by 10.
Exponential Moving Average - EMA Indicator
Stock Index EMA indicator applies more weight to the most recent price data and is calculated by assigning the latest price values more weight based on a percent P, multiplier that's used to multiply & assign more weight to the latest price data.
Linear Weighted Moving Average - LWMA Indicator
Stock Index LWMA indicator moving averages applies more weight to the most recent price data and the latest data is of more value than earlier price data. Linear Weighted Stock Indices moving average is calculated by multiplying each of the closing prices within the series, by a certain weight coefficient.
Smoothed Moving Average - SMMA Indicator
Stock Index SMMA Indicator is calculated by applying a smoothing factor of N, smoothing factor is composed of N smoothing for N price periods.
The chart example below shows SMA, EMA & LWMA. The SMMA Stock Index moving average isn't commonly used so it is not shown below.
The LWMA indicator reacts fastest to price data, followed by the EMA & then the SMA.
SMA, LWMA, EMA - Types of Stock Index Moving Averages - SMA, EMA & LWMA
Day Trading Stock Index with Exponential and Simple Moving Averages
The SMA & EMA Stock Index moving averages are the most commonly used Moving averages to trade Indices. Whereas the EMA Stock Index moving average has a more sophisticated method of calculation, its more popular than the SMA Stock Index moving average.
Simple Moving Average is the arithmetic mean of the closing prices in the price period based on the set time period where each time period is added and then it's divided by the number of time price periods chosen. If 10 is the price period used the price for the last ten Stock Indices price periods added up then it's divided by 10.
SMA indicator is the result of a simple arithmetic average. Very simple and some Stock Indices traders tend to associate with the trend since it closely follows Stock Indices price action.
EMA on the other hand uses an acceleration factor & it's more responsive to the trend.
The SMA Stock Index moving average is used in Stock Indices charts to analyze price action. If the price action in more than 3 or 4 time price periods the SMA then its an indication that long Stock Index trades should be closed immediately & the bullish momentum of the buy trade is waning.
The shorter the SMA price period the faster it is to respond to Indices price change. SMA indicator can be used to show direct information regarding the trend of the market & the strength by looking at its slope, steeper or more pronounced slope of the SMA is, stronger the trend.
The Exponential Moving Average is also used by many Stock Index traders in the same way but it reacts faster to the market moves and therefore it's more preferred by some Stock Indices traders.
The SMA & EMA can also be used to generate entry & exit points when Stock Indices trading. These Moving averages can also be combined with Fibonacci and ADX indicators to generate confirmation the signals generated by these moving averages.
