Over the years numerous technical indicators have been developed to describe performance, as well as to predict future price movements. In this section we introduce five of the most useful indicators and explain how they are calculated.

Moving Average

A price/time series can be seen as a representation of a longer-term trend on which is superimposed on a shorter-term, random fluctuating "noise." In order to obtain a clean trend signal, using moving averages can filter out shorter-term noises. The formula for calculating the p-interval moving-average time series is given by

Where,

is the price time series, and n is the number of periods.

The moving average defined above assigns equal weight to every point in the averaging interval; consequently, it may not emphasize the most recent price behavior. To overcome this, some people use the p-period exponential moving average:

In reality, it is good enough to run the summation through j=i-2p, to j=i.

next