There are many variations on a theme with moving averages which allow for a faster or slower reaction to market moves. One of the ways to have a faster moving average is to use less days in the calculation, such as a 5-day instead of a 20-day. Using the same logic, a 20-day moving average might be preferred over a 5-day moving average if a slower average is required.

Another way to make the average react more quickly or slowly to market movement is by weighting the time periods of the average.

A weighted moving average places weights on each time period of the moving average. In the previous example, the simple four-day moving average weighted each period equally by dividing each day by four. The simple moving average is actually a weighted moving average, but the weights are equal for each period.

A weighted moving average can be designed to place more emphasis on certain time periods. For example, if a trader desires an average which reacts more quickly to market movement, then an average could be constructed to place emphasis on the more recent time periods.

The exponential moving average is another variation on a moving Average, but is calculated differently. The exponential moving average uses all the price data and does not drop off older price data, like the simple and weighted moving average. However, the recent price action is weighted more heavily than the earlier prices.

As may be seen by the calculations, an exponential moving average is actually easier to calculate than a simple moving average. You may be wondering-how do you arrive at the first exponential moving average value? Simply substitute the market price in the first period as the first exponential value, and then begin calculating the exponential average for period two as already described. The smoothing constant will change the weighting of the data.