Weighted Moving Average – Production and Operations Management
Moving Averages Method
The moving overage is a ‘discrete’ averaging method, where periods in the past beyond a certain number are considered irrelevant for the analysis. For example an organization wishes to apply a 8-week moving average for forecasting sales of a particular item; they will add sales for the last 8 weeks and divide by 8 to get the average. A week later, they would add the newest weeks’ sales and discord the oldest, so that once again they have a current total of the past 10 weeks of sales. Further, it needs to be divided by 8 to get the new moving average.
The message given by the moving averages technique is that, history helps to plan the future, but history beyond a certain time period in the past has very little influence on the future. One could have also weighed moving averages, where different weights are given to the different periods of time in the past.
The exponential moving average (EMA) is a weighted average of the last n prices, where the weighting decreases exponentially with each previous price/period. In other words, the formula gives recent prices more weight than past prices. For example. The EMA adapts more quickly to price changes than the SMA.
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