A moving average is one of the key technical indicators used to combine important data points over a particular time frame while filtering out random price movements.
There are three main types of the moving average indicator, including simple, exponential, and weighted.
The simple moving average (SMA), as its name suggests, is the most basic type, serving to recalculate the average price of a stock on a daily basis, over a specific number of days. Each time the market opens, the last price data is replaced with the latest, which effectively “moves” the average as new trading sessions open and close.
In comparison, the exponential moving average (EMA) was designed to focus more on the most recent prices. This technical indicator uses a smoothing multiplier that applies an equal weight to all price data in the specified time frame. Investors analyze different EMA lengths, including the 10-day, 50-day, and 200-day moving averages.
Finally, the weighted moving average, just like the EMA, focuses more on the most recent data over a specific time period, however, it adds weighting to the latest prices. For this reason, the weighted moving average is considered more accurate compared to the SMA, which equally weighs all prices.
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