ETF Trends
04-28-2008, 02:40 PM
ETF Trends - Keeping a Grip on Exchange Traded Funds (ETFs)
http://www.etftrends.com/images/2008/04/28/moving_average_5.gif (http://etftrends.typepad.com/photos/uncategorized/2008/04/28/moving_average_5.gif) When you're looking at charts tracking the performance of exchange traded funds (ETFs), do you ever wonder how the moving averages for them are calculated?
They're one of the simplest ways for investors to follow trends, and we even use them in our own investment strategy.
Stock Charts (http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:movi ng_averages) has a great article detailing the different moving averages and how they're assembled. The two most popular are the simple moving average (SMA) and the exponential moving average (EMA).
Until last week, we had been using charts illustrating the SMA. Now, we've switched to the EMA. It's as good a time as any to explain the differences between the two for curious investors.
The SMA is calculated by tracking the price of a security over a specified time period. Over time, the averages are assembled into a smooth line giving an investor a clear picture of a trend. For a five-day moving average, one would take the closing prices for the last five days, then divide by five. As time marches on, the old data is dropped and new data is factored in.
The EMA is a bit trickier and comes with a formula that might make your head hurt.
Courtesy of Casey Murphy for Investopedia (http://www.investopedia.com/university/movingaverage/movingaverages1.asp), here it is:
http://www.etftrends.com/images/2008/04/28/calculationema.gif (http://etftrends.typepad.com/photos/uncategorized/2008/04/28/calculationema.gif)
The idea is essentially similar to the SMA, but more weight is given to the most recent data, according to Investopedia (http://www.investopedia.com/terms/e/ema.asp).
The difference between the two is that the EMA is consistently closer to the actual price. The EMA is also quicker to notice a trend, since it reacts more quickly than the SMA.
Which moving average you use depends on your personal preference as well as your investing style.
Some prefer the EMA for shorter time periods so they can identify trends more quickly. Others like the SMA to track trends over long time periods. Which moving average you use is also dependent on the security you're tracking and how it has reacted to changes in the past.
Stock Charts suggests trying both types of trend lines and see what works for you. Just be aware that choosing a short time frame for your moving average or a more sensitive indicator will generate more buy and sell signals.
Our investing strategy is to stick to the 200-day EMA to help us identify trends so we know when to be in and when it's time to get back out.
complete story here... (http://feeds.feedburner.com/~r/etftrends-feed/~3/279579241/moving-averag-1.html)
http://www.etftrends.com/images/2008/04/28/moving_average_5.gif (http://etftrends.typepad.com/photos/uncategorized/2008/04/28/moving_average_5.gif) When you're looking at charts tracking the performance of exchange traded funds (ETFs), do you ever wonder how the moving averages for them are calculated?
They're one of the simplest ways for investors to follow trends, and we even use them in our own investment strategy.
Stock Charts (http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:movi ng_averages) has a great article detailing the different moving averages and how they're assembled. The two most popular are the simple moving average (SMA) and the exponential moving average (EMA).
Until last week, we had been using charts illustrating the SMA. Now, we've switched to the EMA. It's as good a time as any to explain the differences between the two for curious investors.
The SMA is calculated by tracking the price of a security over a specified time period. Over time, the averages are assembled into a smooth line giving an investor a clear picture of a trend. For a five-day moving average, one would take the closing prices for the last five days, then divide by five. As time marches on, the old data is dropped and new data is factored in.
The EMA is a bit trickier and comes with a formula that might make your head hurt.
Courtesy of Casey Murphy for Investopedia (http://www.investopedia.com/university/movingaverage/movingaverages1.asp), here it is:
http://www.etftrends.com/images/2008/04/28/calculationema.gif (http://etftrends.typepad.com/photos/uncategorized/2008/04/28/calculationema.gif)
The idea is essentially similar to the SMA, but more weight is given to the most recent data, according to Investopedia (http://www.investopedia.com/terms/e/ema.asp).
The difference between the two is that the EMA is consistently closer to the actual price. The EMA is also quicker to notice a trend, since it reacts more quickly than the SMA.
Which moving average you use depends on your personal preference as well as your investing style.
Some prefer the EMA for shorter time periods so they can identify trends more quickly. Others like the SMA to track trends over long time periods. Which moving average you use is also dependent on the security you're tracking and how it has reacted to changes in the past.
Stock Charts suggests trying both types of trend lines and see what works for you. Just be aware that choosing a short time frame for your moving average or a more sensitive indicator will generate more buy and sell signals.
Our investing strategy is to stick to the 200-day EMA to help us identify trends so we know when to be in and when it's time to get back out.
complete story here... (http://feeds.feedburner.com/~r/etftrends-feed/~3/279579241/moving-averag-1.html)