Moving averages

Moving averages provide data analysts and scientists with a basic predictive model. Despite its simplicity, the moving average method is widely used in the technical analysis of financial markets to define a dynamic level of support and resistance for the price of a given security.

Note

Let's consider a time series x_t= x(t) and a function f(x_t-p, x_t-1) that reduces the last p observations into a value or average. The prediction or estimation of the observation at t+1 is defined by the following formula:

Here, f is an average reducing function from the previous p data points.

The simple moving average

Simple moving average, a smoothing method, is the simplest form of the moving averages algorithms [3:1]. The simple moving average of period p estimates the value at time t by computing the average value of the previous p observations using the following formula:

Note

The simple moving average of a time series {xt} with a period p is computed as the average of the last p observations...