10 day) follows prices closely, while the 25 day follows below it, and then the 50 day is below these two. The alignment of the moving averages in an uptrend is as follows: the shorter term MA (e.g. Also another commonly used triple crossover system used is the 4-9-18 day moving average system. This is called the triple crossover technique.įor example the 10-25-50 day moving averages can be used. The best performance is achieved when a shorter term average is rising above a medium-term average and both are rising above a long-term moving average. Looking at the diagram, we can see how the EMA reacts quicker to a change in the trend compared to the slower SMA. The advantage of this is that the exponential moving average is more sensitive and moves closer to the price action while at the same time takes into account its calculation of all the data in life of the security. This moving average assigns more weight on the recent prices and also includes all the price action in the history of the security. In order to solve this problem, the exponential moving average (EMA) can be used. However, the weighted moving average takes into account the prices covered by the period of the moving average and not all the data in the life of the security. If you add the multipliers of the 5 day WMA example, the number is 15. Once the total has been determined, we then divide the number by the addition of the multipliers. The weighted moving average assigns more weight to recent prices and less weight to older prices.įor example, to calculate a 5 day WMA, we should take the closing price of the 5th day and multiply this by 5, the 4th day by 4, the 3rd day by 3, the 2nd day by 2 and the 1st day by 1.
To overcome this issue, the weighted moving average (WMA) can be used. This is the main criticism of the simple moving average and some believe that more weight should be given to the more recent price action. So in a 21 day moving average, the 1st day carries equal weight to the 21st day.
The problem with the simple moving average is that only the period covered by the average is considered and each day is given equal weight.
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