Adaptive Moving Average
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A moving average refers to an average of price or volume over a specified period which is displayed as a smooth line superimposed over the data being averaged. Below is a chart that displays a 30-Day Simple Moving Average - SMA 30 - over a period of 6 months.
A moving average, in finance and especially in technical analysis, is a time honoured tool which helps the investor to gain perspective of the current stock price in relation to a measured period of time.
For example, to calculate a 30-day simple moving average of price, add the closing prices of 30 consecutive price bars and divide this sum by 30. You then have the average price of a security over the last 30 days which is the price point that is then marked on a chart.
The next chart below shows an example of how you can incorporate 3 adaptive moving averages by using a 7-Day, 30-Day and 200-Day SMA simultaneously over a 1 year period.
Moving averages can be calculated for any time periods and are used to smooth out short-term fluctuations, thus highlighting longer-term trends or cycles. The threshold between short-term and long-term depends on the application, and the parameters of the moving average will be set accordingly.
Ricky Schmidt
January 10, 2007
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