What you will learn
- Simple and exponential averages
- Lag and responsiveness
- Warm-up observations
- Price crossings and whipsaws
Simple and exponential averages
A simple moving average assigns equal weight to a specified trailing window. An exponential average weights recent observations more heavily under its smoothing convention. Record the input price, window and initialization; the indicator name alone does not fully specify the calculation.
Lag and responsiveness
Smoothing reduces short-term variation at the cost of delayed response. A faster average follows noise more closely as well as responding sooner to changes. There is no parameter that eliminates the trade-off in every price regime.
Warm-up observations
An indicator needs enough past observations to initialize. Values near the start of a dataset can depend on the seed convention. Compare implementations only after matching warm-up, missing-data handling and the same source observations.
Price crossings and whipsaws
Price crossings of an average are events, not complete strategies. Repeated crossings in a range can create turnover and costs. Define eligibility, execution timing and exit rules before evaluating a crossing system.
Worked example
For closes 10, 12 and 14, a three-value simple average is 12. Adding 16 and dropping 10 gives 14. The average changes because the trailing window changes, not because future prices have been predicted.
Try it yourself
Calculate the next three-value average after a close of 11 follows 12, 14 and 16. State the retained observations.
Show the worked solution
The retained window is 14, 16 and 11, whose mean is 41/3, approximately 13.67. Using all five values would calculate a different statistic from the specified trailing average.
Apply this to your course project
Compare several indicators derived from the same prices and document redundant information.
Keep the calculation inputs, assumptions and decisions with your work. Practical exercises are self-reviewed; the scored knowledge checks assess the questions shown, not an independent certification of practical competence.