Calculating Moving Averages in Python: A Comprehensive Guide

Moving averages are essential tools in data analysis and financial markets, used to smooth out short-term fluctuations and highlight longer-term trends. In this blog, we'll explore how to calculate different types of moving averages in Python, using popular libraries like Pandas.

Understanding Moving Averages

A moving average is a statistical technique used to analyze data points by creating a series of averages of different subsets of the full data set. There are several types of moving averages:

1. Simple Moving Average (SMA): The unweighted mean of the previous n data points.

2. Exponential Moving Average (EMA): A weighted mean where more recent data points have more influence.

3. Weighted Moving Average (WMA): Similar to EMA, but uses different weights for each data point.

Prerequisites

Before diving into the code, make sure you have the following libraries installed:

1. Pandas: For data manipulation.

    pip install pandas
   

2. NumPy: For numerical operations.

    pip install numpy
   

Importing Libraries and Sample Data

Let's start by importing the necessary libraries and creating a sample dataset.

import pandas as pd
import numpy as np
import matplotlib.pyplot as plt

# Sample data
data = {
    'Date': pd.date_range(start='1/1/2020', periods=100),
    'Price': np.random.randn(100).cumsum() + 100
}

df = pd.DataFrame(data)
df.set_index('Date', inplace=True)
print(df.head())

Calculating Simple Moving Average (SMA)

The Simple Moving Average (SMA) is the most straightforward moving average. It's calculated by taking the average of a fixed number of previous periods.

def calculate_sma(data, window):
    return data.rolling(window=window).mean()

# Calculate 10-day SMA
df['SMA_10'] = calculate_sma(df['Price'], 10)
print(df.head(15))

Calculating Exponential Moving Average (EMA)

The Exponential Moving Average (EMA) gives more weight to recent prices, making it more responsive to new information.

def calculate_ema(data, span):
    return data.ewm(span=span, adjust=False).mean()

# Calculate 10-day EMA
df['EMA_10'] = calculate_ema(df['Price'], 10)
print(df.head(15))

Calculating Weighted Moving Average (WMA)

The Weighted Moving Average (WMA) assigns different weights to each data point, with the most recent data points usually having the highest weights.

def calculate_wma(data, window):
    weights = np.arange(1, window + 1)
    return data.rolling(window).apply(lambda prices: np.dot(prices, weights) / weights.sum(), raw=True)

# Calculate 10-day WMA
df['WMA_10'] = calculate_wma(df['Price'], 10)
print(df.head(15))

Visualizing Moving Averages

Visualizing moving averages can provide a clearer picture of the underlying trends in the data.

plt.figure(figsize=(14, 7))
plt.plot(df['Price'], label='Price', linewidth=2)
plt.plot(df['SMA_10'], label='10-day SMA', linestyle='--')
plt.plot(df['EMA_10'], label='10-day EMA', linestyle='--')
plt.plot(df['WMA_10'], label='10-day WMA', linestyle='--')
plt.title('Price and Moving Averages')
plt.xlabel('Date')
plt.ylabel('Price')
plt.legend()
plt.show()

Keep exploring these techniques to enhance your data analysis skills and apply them to various datasets and scenarios.