Moving Average

A moving average is the average price of a contract over the previous n-period closes. For example, a 9-period moving average is the average of the closing prices for the past 9 periods, including the current period. For intra-day data the current price is used in place of the closing price.

The moving average is used to observe price changes. The effect of the moving average is to smooth the price movement so that the longer term trend becomes less volatile and therefore more obvious. When the price rises above the moving average, it indicates that investors are becoming bullish on the commodity. When the prices falls below, it indicates a bearish commodity. As well, when a moving average crosses below a longer term moving average, the study indicates a down turn in the market. When a short term moving average crosses above a longer term moving average, this indicates an upswing in the market. The longer the period of the moving average, the smoother the price movement is. Longer moving averages are used to isolate long term trends.

There are many variations of the moving average available, such as the moving average of the high prices and the low prices represented in a channel called the Moving Average High/Low channel, this is also known as the Jake Bernstien's high/low channel. There is also the Moving Average Percent Channel. The first argument (X) is the x-day moving average of the closing price and the second argument (Y) is used as (Y/10,000*Price) plotted as a channel around over and under the result of the x-day moving average.

The Exponential Moving Average assigns a weight to the price data as the average is calculated. The more recent the price the heavier the weighting. The oldest price data in the exponential moving average is never removed from the calculation, but its weighting is decreased the further back it gets in the calculations.

As an example, the calculations for a 10 period exponential moving average are as follows.

Barchart.com uses the classical exponential smoothing formulas described by H. Wells Wilder in his book "New Concepts in Technical Analysis". This defines the smoothing factor as 1/days or 1/3 for a 3 day exponential moving average study. The result of the study will then be 2/3 of the old value plus 1/3 of the new. Others have developed their own formulas, the most notable being Trade Station. In the Trade Station and some other look-alike formulas, the smoothing factor is defined as 2/(days+1), which for the 3 day study produces 2/4 or 1/2. This gives a result of 1/2 of the old plus 1/2 of the new. 1/2 smoothing will give "faster" results than 1/3 smoothing. You might get an equivalent result if you used a 2-day smoothing factor on the barchart calculations. Alternatively, if you want a 1/3 smoothing on a site using the Trade Station logic, you might try a 5 day factor, 2/(5+1)= 2/6 = 1/3.

The Offset Moving Average is a simple moving average offset by moving the average "x" periods to the right, where "x" is the second argument. The first argument is used to calculate the simple moving average of the price, and the second argument determines the number of offsets to the right, hence shifting the moving average "x" periods to the right. The Exponential Moving Average is the same except it uses the exponential moving average in the calculation.

The Offset MidPoint Average is a simple moving average calculated from the average of the high and low for the period, offset by moving the average "x" periods to the right, where "x" is the second argument.

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