Moving averages and moving average convergence divergence

  Moving averages is one of the most popular and reliable tool used in stock market technical analysis. In statistics it is also known as rolling average or running average. Some people call this as moving mean or rolling mean. Moving average is the average price of a stock over time. It is calculated by averaging the initial fixed subset of number series or data points.
 In stock market moving average (MA) is used to determine the trend of the market or a security. Upward trend is confirmed when short term moving average crosses above a longer term moving average and downward trend is recognized when short term moving average breaches below longer term moving average. For example if 50 MA crosses above 100 MA it is considered as up trend. If 50 MA falls below 100 MA trend is bearish.
 Simple moving average (SMA), Cumulative moving average (CMA), Weighted moving average (WMA) and Exponential moving average (EMA) are important  types of Moving averages.Modified moving average (MMA) or Running moving average (RMA), or Smoothed moving average is also considered as a moving average.
 As I said above Moving averages allow traders to recognize and confirm the trend. Thus by identifying the trend he can achieve success in his trade.

Moving Average Convergence Divergence (MACD)
MACD or moving average convergence divergence was developed by Gerald Appel in late 1970's. It is also a simplest and useful technical indicator used in stock market. It is based on exponential moving average. In a chart it is a collection of three signals namely MACD line, Signal line and the divergence (difference) line. These signals are calculated from historical prices of a financial instrument (indice or stock).Most people use closing prices to calculate MACD.
 The first signal 'MACD line' is the difference between a short term (fast) exponential moving average , and a longer term (slow) exponential moving average. In a chart MACD line is changing over time along with 'signal line'. MACD histogram time series is an oscillator which shows the divergence between MACD line and Signal line.
 The standard setting for MACD used in stock market is 12,26 and 9. MACD 3,10,16 is also used by some traders.

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Exponential moving average and how to calculate EMA

Exponential Moving Average (EMA)
 Exponential moving average or EMA is also known as exponentially weighted moving average (EWMA). It gives more weight to recent prices in other words the weight of old prices decreases exponentially.
 A seven day EMA applies 25 per cent weighting Calculation of EMA is a complicated one. Stock market traders can get EMA from almost all technical charts.
In order to calculate EMA, first calculate SMA.
SMA = Mean or average of previous n days= Sum of n days / n
For eg, 7 SMA= Sum of Seven days closing price / 7
Then you have to find smoothing factor.
Smoothing factor = (2 / (Time periods + 1) ) = (2 / (7 + 1) ) = 0.25 (25 per cent weighting; ie 0.25*100)
Then calculate EMA by applying the following formula.

EMA= [Close - EMA(Yesterday)] x Smoothing Factor + EMA(Yesterday).

Note that Some people use current price instead of close.

If you know the per cent and want to get time period you can use the following formula.

Time period= (2/Smoothing Factor)-1
Here smoothing factor is per cent divided by 100.
For eg;- If the per cent is 25, smoothing factor is 25/100= 0.25
Then time period= (2/0.25)-1= 7; so seven is the time period.

An example of EMA calculation on a sheet is given below

Day	Close	7 SMA	Smoothing Factor	EMA 7
1	87.50
2	86.00
3	85.00
4	86.20
5	87.00
6	85.00
7	85.70	86.06		86.06
8	86.70	85.94	0.2500	86.22
9	87.20	86.11	0.2500	86.47
10	87.50	86.47	0.2500	86.72
11	87.70	86.69	0.2500	86.97
12	88.00	86.83	0.2500	87.23
13	88.80	87.37	0.2500	87.62
14	89.20	87.87	0.2500	88.01
15	90.20	88.37	0.2500	88.56
16	91.20	88.94	0.2500	89.22
17	91.70	89.54	0.2500	89.84
18	91.90	90.14	0.2500	90.36
19	92.50	90.79	0.2500	90.89
20	93.00	91.39	0.2500	91.42
21	93.50	92.00	0.2500	91.94
22	93.20	92.43	0.2500	92.25
23	92.70	92.64	0.2500	92.37
24	90.50	92.47	0.2500	91.90
25	91.70	92.44	0.2500	91.85
26	92.30	92.41	0.2500	91.96
27	93.80	92.53	0.2500	92.42
28	94.50	92.67	0.2500	92.94
29	94.80	92.90	0.2500	93.41
30	95.50	93.30	0.2500	93.93

EMA 5, 10, 20, 50, 100, and 200 are very common in stock market trading

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