Understanding Moving Averages Can Help Your ETF Strategy | ETF Trends

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 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, here it is: