## Wednesday, October 14, 2009

### Method of Moving Averages

While applying this method the given values are grouped containing 3,4,5........... items and their averages are taken . The averages are written in the middle of the period of the moving average . The totals are taken for overlapping periods . For example in a five year moving average the total of first five items will be written against the third value .

Then the total of next five items leaving the first one will written against the third value . Then the total of next five items leaving the first one will written against the next item . This process will be continued till all the groups , each containing five items , are summed up and averages are taken . The set of averages of these total will determine the trend values .

This process of taking means , smooths the curve and reduces the fluctuations in the data . It simplifies the analysis and removes the periodicity . Variations of the period of moving average is equal to the period of the cycle . As such if there is regularity in the occurrences of business cycle ,the moving average will form a straight lines .

when the values are plotted on a graph , otherwise it will be a set of straight lines . The period of moving averages have to be determined with due consideration to the periodicity of cycle .In case the period of moving averages and the period of the cycle are not same then the trend values will display a cycle having the same period as the cycle in the data .

But the amplitude will be less as compared to that data. The period of moving average is taken a little greater than the period of the cycle if the cycles in the data are uniform duration .If the period of moving average is even then some extra precautions have to be taken while computing the trend values . Let us suppose that the period of moving average is four years .

As usual the over lapping totals will be taken in groups each containing four items . First total will be written in between the second and the third item . Next total will be between third and fourth items . This will continue till all the groups are totalled and written properly at the corresponding positions .

The averages of these totals will fail to determine trend values because these will not be against the given values and such will be non comparable with the given values . To overcome this discrepancy the averages are grouped in pairs and again written in the middle of each pair . The averages of these pairs will be the trend values . This technique is known as centering the averages . Moving averages of all even periods are processed by the centering method .
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