One of the most basic trading tools is the simple moving average (SMA), which is the average price of a market over a certain time period. A five-day SMA is the sum of the five most recent closing prices divided by five; each day’s price is equally weighted in the calculation.
Other types of moving averages give greater weight to recent prices based on the idea that current market activity is more relevant than more distant activity, and that such altered moving averages will be more responsive to price movement –– i.e., change direction more quickly when price changes direction. The two most popular variations of this type are the weighted moving average (WMA) and the exponentially weighted moving average or, simply, exponential moving average (EMA).
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