Moving averages are one of the simplest and most commonly used use tools available to the technical analyst. They are used not only to analyze a trend, but also as a foundation stone in more complex technical indicators. In almost any technical indicator you will find that the moving averages are used to smooth data and draw signal lines. Moving averages could be called the most important tool in technical analysis.
There are two types of moving averages - simple moving average and exponential moving average. A simple moving average is calculated as the sum of the price values over a specified period of time (a specified number of bars) divided by the number of bars in that period. An exponential moving average can be calculated as a percent-based EMA or as a period-based EMA. The formula for an exponential moving average is:
Current EMA = ( (Current Price - Previous EMA ) x Multiplier) + Previous EMA
MACD is one of the most frequently used indicators in technical analysis and is calculated as the difference between two exponential moving averages (EMA) applied to the close price:
MACD = Fast Exponential Moving Average - Slow Exponential Moving Average
A MACD signal line (or trigger line) is then formed by applying exponential or simple moving average to the MACD line.
MACD Signal = MA applied to MACD
The difference between the MACD and the MACD signal line forms the MACD Histogram.
MACD Histogram = MACD - MACD Signal Line.
Stochastics measures the relationship between a price and a price range over a specified period of time. Stochastics is formed by the Raw Stochastics Line, the %K line (Fast Stochastics), and it is the %D line (Slow Stochastics). The Raw Stochastics value is calculated by the following formula:
Raw Stochastics = 100 [(C - L14) / (H14 - L14)]
A 3-period moving average is applied to Raw Stochastics to form %K (fast Stochastics). Still, Fast Stochastics can be very volatile and another 3-period moving average is applied to %K to form %D (Slow Stochastics).
The Relative Strength Index (RSI) is one of the most popular momentum oscillators in technical analysis. The RSI compares recent gains to recent losses. The RSI is calculated by the following formula:
RSI = 100 - 100 / (1 + RS)
where RS stands for Relative Strength and is calculated as the ratio of average gains to average losses. The average gain is calculated as the sum of the gains in winning periods divided by the total number of periods. The average loss is calculated as the sum of the losses in losing periods divided by the total number of periods.