Simple moving averages (SMAs)
A simple moving average is the basic way that moving averages are calculated. Every set of values across the period that's being used for the average is given the same weight, so if it were a 14-day window prior to the day in question, each of those 14 values would be simply averaged.
This is typically fine for short windows of time, since it's unlikely that any serious changes in movement or sentiment have happened yet, but it can be less accurate for longer windows, during which major events like financial reports may have changed sentiment entirely.
Exponential moving averages (EMAs)
Exponential moving averages are a bit more complex and are designed to make the moving average more responsive to new information. This helps especially when the market is particularly frothy or there has been some kind of recent event that could markedly change investor sentiment. Longer windows of time considered in the averaging period also tend to work a little better with exponential moving averages.
How to calculate a moving average
The two types of common moving averages have different formulas. Both will require that you know the set of values, such as the closing price of a particular stock or exchange-traded fund (ETF) for the period you're interested in examining, and how many days are in your period.
Simple moving average formula
The simple moving average (SMA) is a simple average of the values in your set, divided by the total number of values. So, if you have 14 days of closing prices for stock ABC, Inc., you'll have 14 values in your set.
That formula looks like this:
SMA = (V1 + V2 + V3 +...+Vn) / n
Where:
V = the closing value for each individual day
n = the number of values (days)
Repeat this formula for every day in the set you're examining -- a spreadsheet can be really helpful to complete this task, but for small time periods, pen and paper will do.
Exponential moving average formula
The exponential moving average (EMA) formula is more complex, and it would be much easier for you to use a tool to do the calculation, since you'll need to do this calculation for each and every day in your set. But for the sake of completeness, this is what the formula looks like:
EMAt = [ Vt x (s / 1+d)] + EMAy x [1 - (s / 1+d)]
Where:
EMAt = today's EMA (often the SMA is used)
Vt = today's value
EMAy = yesterday's EMA
d = number of days
s = smoothing factor, the equation is as follows:
s = [2 / (days in time period + 1)]
(This is why it's a lot easier to use a computer to do EMAs.)
