Whether using a momentum or mean-reversion strategy for trading, the analyses will, in one form or another, utilize moving averages of the closing price of stocks. We have seen these before when we looked at calculating a rolling mean. We will now examine several different forms of rolling means and cover several concepts that are important to use in order to make trading decisions based upon how one or more means move over time:
Simple moving average
Exponential moving average
A moving average is a technical analysis technique that smooths price data by calculating a constantly updated average price. This average is taken over a specific period of time, ranging from minutes, to days, weeks, and months. The period selected depends on the type of movement of interest, such as making a decision on short-term, medium-term, or long-term investment.
Moving averages give us a means to relate the price data to determine a trend indicator. A moving average does not...