# What are moving averages in options trading?

Moving averages are similar to averages we use in our daily lives and are used to identify trends. It is a popular technical indicator used in the stock analysis to predict the direction of a particular trend. Moving Averages are of two types: Simple and Exponential. Both simple and exponential are similar except for the fact that in exponential added weight is given to the latest data. An exponential average is considered to be more effective in predicting recent changes in the market.

How to calculate Simple Moving Averages?

Suppose you want to calculate the simple moving average closing price of SBI for last 5 days-

Day SBI Closing Price
1 300
2 280
3 320
4 325
5 320

The average comes out to= 1545/5= 309

Now SBI price moves to 325 on the 6th day. What will be the moving average for last 5 days? To calculate the average you need to drop the value of day 1 and add the price for day 6 in the above calculation.

Suppose SBI moves to 320 on the 7th day. What will be the moving average for last 5 days? To calculate the average you need to drop the value of day 1 & 2 and add the price for day 6 & 7 in the above calculation.

 Day SBI Closing Price Last 5 day Average 1 300 2 280 3 320 4 325 5 320 309 (Day 1-5) 6 325 314 (Day 2-6) 7 320 322(Day 3-7) 8 310 320 (Day 4-8) 9 315 318 (Day 5-9) 10 325 319 (Day 6-10)

The series of values you get in last 5-day average column is the moving average. It keeps on changing with each passing day.

How to calculate the exponential moving average (EMA)?

An exponential moving average is calculated as-

EMA= (Closing price –EMA (previous day)) * (2/(Time period+1) + EMA (previous day)

 Day SBI Closing Price Last 5-day Exponential Average 1 300 2 280 3 320 4 325 5 320 91.43 6 325 158.16 7 320 204.40 8 310 234.57 9 315 257.55 10 325 276.82