Thanks a lot for your reply. I have gone through the link you provided but I guess a novice like me would be need some spoon feeding. I'll appreciate if you can explain the theory provided in link with some real values, like calculating MMA for 10 days for any stock.
Let me know if I am getting too much demanding
Hi sethrohit,
Your queries are absolutely correct. The idea behind MMA is like this. Let’s say you have 2 apples which you bought from somebody from 2 Rs. Now somebody comes to you and buy 1 apple from you in 4 Rs.
So now you have one apple which you bought in 2 Rs and he has one apple which he bought from you 4 Rs.
Suppose now somebody comes and want to buy both apples. So you will be OK if he pays you anything above 2 Rs and the other guy should be OK if he pays him anything above 4 Rs. So his average buy out price will be 3 Rs or more if both are looking for a profit.
The MMA formula also works the same way.
suppose in last example if new guy bought both apple in 4 Rs then the price of apple is now 4 Rs not 2 or not 3 but if we calculate same price using Simple moving average then it comes out (2 + 3 + 4 ) / 3 which is 3, which not correct.
So the effort, which MMA does is it tries to find out correct price of apple ( in this case ) or shares .
Using that price you can see if really a stock is overbought or oversold. IF you find a major gap between MMA and stock price then it is either in overbought or oversold zone and should come near to MMA price. So volume or price drives it to make MMA either high or low or price high or low.
So all 4 factor current price, current volume, historical price and historical volume works together and create a price.
The major difference which comes between this indicator and Simple Moving Average/Exp. Moving Average is MMA never neglect any of these 4 parameters(volume,price,historical price,historical volume) but SMA or EMA just neglect them after certain period. Suppose if you are calculating SMA of 5 days and just 5 days before heavy price fluctuation happened with heavy volume, what you will see while drawing SMA till 5 days that price is having impact in creating SMA but on 6th day SMA forget about that and zero impact on SMA which is incorrect. While MMA will have impact of that price and volume no matter how many days we go till a good volume comes again.
While SMA/MMA try to keep itself near to current price and try to tell us current trend. MMA try to tell us average price of share
