Types of Indices Moving Averages

There are four types of indices trading moving averages:

1. Simple indices trading moving average
2. Exponential indices trading moving average
3. Smoothed indices trading moving average
4. Linear weighted indices trading moving average

The difference between these 4 indices trading moving averages is the weight assigned in to the most recent price data.

Simple Moving Average

Indices SMA indicator applies equal weight to the indices trading data used to calculate the simple moving average and is calculated by summing up the price periods of a chart and this value is then divided by the number of such stock price periods. For example indices trading simple moving average 10, adds the price data for the last 10 stock price periods and divides them by 10.

Exponential Moving Average

Indices 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 is used to multiply and assign more weight to the latest price data.

Linear Weighted Moving Average

Indices 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 indices trading moving average is calculated by multiplying each of the indices trading closing prices within the series, by a certain weight coefficient.

Smoothed Moving Average

Indices SMMA Indicator is calculated by applying a smoothing factor of N, the smoothing factor is composed of N smoothing for N stock price periods.

The chart example explained and illustrated below shows SMA, EMA and LWMA. The SMMA indices moving average is not oftenly used so it is not shown below.

The LWMA stock indicator reacts fastest to price data, followed by the EMA and then the SMA.

SMA, LWMA, EMA - Types of Indices Moving Averages - SMA, EMA and LWMA

Day Trading Indices with Exponential and Simple Moving Averages

The SMA and EMA indices trading moving averages are the most commonly used Moving averages to trade indices. Whereas the EMA indices trading moving average has a more sophisticated method of calculation, its more popular than the SMA indices trading 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 is divided by the number of time price periods chosen. If 10 is the price period used the price for the last ten stock price periods added up then it is divided by 10.

SMA stock indicator is the result of a simple arithmetic average. Very simple and some traders tend to associate with the trend since it closely follows price action.

EMA on the other hand uses an acceleration factor and it is more responsive to the trend.

The SMA indices trading moving average is used in stock charts to analyze price action. If the price action in more than 3 or 4 time price periods the SMA then it's an indication that long stock trades should be closed immediately and the bullish momentum of the buy trade is waning.

The shorter the SMA stock price period the faster it is to respond to price change. SMA stock indicator can be used to show direct information regarding the trend of the trading market and the strength by looking at its slope, the steeper or more pronounced slope of the SMA is, the stronger the trend.

The Exponential Moving Average is also used by many traders in the same way but it reacts faster to the trading market moves and therefore it is more preferred by some stock traders.

The SMA and EMA can also be used to generate entry and exit points when indices trading. These Moving averages can also be combined with Fibonacci and ADX indicators to generate confirmation the signals generated by these moving averages.