Logo of Phnom Penh Post newspaper Phnom Penh Post - Moving averages reveal the trends in security pricing

Moving averages reveal the trends in security pricing

Moving averages reveal the trends in security pricing

Moving averages, which plot the average value of a security’s price over a specified period, usually 20, 50, 100 or 200 days, are perhaps the most popular and commonly used tool in technical analysis.
They measure momentum, spot trends and define areas of support and resistance.

Because  moving averages are based on past prices and are therefore lagging, they do not determine price direction but establish a current direction, flattening out price fluctuat-ions and signalling potential entry and exit points.

The two most common types  are the simple moving average (SMA) and the exponential moving average (EMA).

Moving averages may vary in the way they are calculated and may differ in respect to how price data is weighted, but their interpretation remains the same.

A simple moving average  is constructed by calculating the average price of a security over a specific number of periods. Generally, closing prices are used in computing moving averages.

For example, in a five-day moving average, the last five  closing prices are added together, then divided by five.

The average then moves on to the next day, and old data is dropped as new data arrives.

If a security’s daily closing prices were 21, 22, 23, 24, 25, 26 and 27, the first day of the five-day simple moving average would be 23 (21+22+23+24+ 25/5 = 23), the second day would be 24 (22+23+24+25 +26/5 = 24) and so on.

The exponential moving average places a higher weight on recent data points, thus reducing the lag factor.

It’s also much more responsive to new information, and so is favoured by investors.

EMA calculations are complex, but there are programs  that can readily perform them.

Moving averages are typically used to identify whether a security is in an uptrend or a downtrend, depending on the direction of the moving average.

In the chart below, both the 50-day SMA (red) and EMA (green) peaked in January, the EMA with a more pronounced decline. The price of the security kept falling, so the moving averages signalled a downtrend.

In February, the EMA turned up, signalling an uptrend, but the SMA lagged and moved up a month later.

The EMA has less lag and generally turns before the SMA.

As the SMA represents an accurate average of prices for the entire period, it’s best suited to identifyíng support and resistance levels.

Anthony Galliano is the chief executive officer at Cambodian Investment Management.
[email protected]


  • Angkor Wat named as the top landmark for the second year

    Travel website TripAdvisor has named Cambodia’s ancient wonder Angkor Wat as the top landmark in the world for the second year running in their Travelers’ Choice Award 2018, an achievement Cambodian tourism operators expect will attract more tourists to the Kingdom. The website uses traveller

  • Hun Sen detractors ‘will die’

    Prime Minister Hun Sen on Wednesday said those who curse or insult him would eventually die without a plot of land to bury their bodies after being killed by lightning, suffering the same fate as those who recently died in Thmar Baing district in Koh

  • Monks given ‘Samdech’ title for contributions

    Three senior monks on Thursday were given the highest-ranking title “samdech”, with Prime Minister Hun Sen saying that the promotions were due to their contributions to Buddhism. The three distinguished monks were promoted on Thursday morning at Botum Vatey pagoda in Phnom Penh, at a

  • Facing possible sanctions, PM criticises Washington’s rights record

    While United States congressmen are discussing the Cambodia Democracy Act and an amendment that could impose more sanctions against Cambodia’s government, Prime Minister Hun Sen on Tuesday counterattacked by questioning the respect of human rights and democracy under the US-backed Lon Nol regime, and