In my previous blog post we considered the general weighted moving average. In this post we aim to give an overview of some specific types of moving averages. Specifically, we cover “ordinary” moving averages and mention some examples of exotic moving averages.
Ordinary Moving Averages
These are the most common types of moving averages used to time the market.(1)
Simple Moving Average
The Simple Moving Average (SMA) computes the arithmetic mean of n prices
SMA_t(n) = frac1n sum_i=0^n-1 P_t-i.
In this moving average, each price observation has the same weight wi=1 (ψi = 1/n). The average lag time and smoothness of SMA are given by
textLag time(SMA_n) = fracn-12, quad textSmoothness(SMA_n)=n.
Obviously, increasing the size of the averaging window increases both the smoothness and the average lag time of SMA.