Moving Average
MA

Type: Trend follower

Moving averages belong to the oldest and by far mostly used technical indicators. As a rule they are shortened with MA. MA's can be computed in very different kinds and are applicable in varied manner. Beside many independent analyses many other indicators are also based on MA's.
MA's form the basis of most technical analyses.

The term "moving average" expresses both most important properties of the indicator. Average means that about a certain number of days an average value of the market prices is fcalculated . Moving expresses that the calculation with every new stock quote is shifted on a day forwards till the last quote falls out then from the calculation.
The average value is "trend-following", hence the MA is simplest (and probably also most important) of all trend follower.
In the course of the years more and more different calculations were introduced for the MA, among the rest, the weighted, geometrical and exponential calculation. In addition, there came different other ideas, as for example the horizontal or vertical skew.

Calculation:
1. A simple MA:
MAt = (Ct + Ct-1 + Ct-2 + Ct-3 + Ct-n+1): n
Normal calculation of the moving average; all quotes are weighted equally.

2. Weighted MA:
W_MAt = (W1Ct + W2Ct-1 +.... + WnCt-n+1): (W1 + W2 + Wn)
with Wn = respective weighting factor

3. Exponential MA:
E_MAt = E_MA_t-1 + (SF * (ct. - E_MA_t-1))
with SF = evaluation factor (commonly: 2: (n + 1)) 
Weighted:
With this calculation all quotes will stock again with a weighting factor. Generally the factors with advancing actuality of the market prices become bigger. Thus it is achieved that the more actual market prices with a higher weight flow into the formula.

Exponential:
Also here more weight is given to the more actual market prices. Nevertheless, the calculation completely differs from both other methods. Particularly is to be noticed that with the exponential MA not a period is specified to the calculation, but in each case all market prices are pulled up. Hence, it can come with different time row lengths to the different results.
 

Interpretation:
An upward directed MA displays an upward trend, a down directed one a downward trend what arises from the basic idea of the smoothing.
Grundsätzlich gilt, dass MA's mit zunehmendem Berechnungszeitraum immer träger werden. Basically is valid that MA's with advancing calculation period become more and more inert.
Shorter calculation periods deliver faster a new signal. Hence, in stock market phases with short trends it makes sense to choose shorter periods to the calculation.
In stock market phases with strong trends longer periods should be used against it. Disadvantage in short calculation periods is that it often comes to false signals, while with a long calculation period the signals are often only transmitted when already a large part of the market price movement has followed to top or down.
Like the calculation of the MA's the interpretation is also very varied. The most familiar one is:
The standard interpretation, i.e. the cut of the GDs with the underlying market price course. A cut from the bottom up delivers a purchase signal, a cut from top down a sales signal. Because it comes with this approach often to wrong decisions, many analysts use with pleasure also filter. A typical filter is that a percentage (about 2% or 3%) is defined around which of the MA is broken through.