A moving average is a technical indicator that market analysts and investors may use to determine the direction of a trend. It sums up the data points of a financial security over a specific time period and divides the total by the number of data points to arrive at an average. It is called a “moving” average because it is continually recalculated based on the latest price data.
How Does the Moving Average Work?
The moving average is a technical indicator that market analysts and investors can use to determine the direction of a trend. It adds up the data points of a financial asset over a specified period of time and divides the total by the number of data points to arrive at an average. Because the moving average is not stable, it is constantly recalculated based on the latest price data. That's why it's called the "moving" average. Traders can choose different timeframes in different periods to calculate moving averages based on their goals and strategies.
The longer the duration of the moving average, the greater the lag. For example; The 200-day moving average moves slower than the 10-day moving average. In addition, the 200-day moving average indicates a more lagged forecast than the 10-day moving average.
Moving Average Types
A Simple Moving Average (SMA) is a calculation that takes the arithmetic average of a given set of prices over a given number of days in the past. For example, based on price movements in the previous 15, 30, 100 or 200 days.
The Exponential Moving Average (EMA) is a calculation that averages historical price data, similar to the Simple Moving Average, with more weight given to recent current price data. The EMA is considered a less lagged moving average, given the weight of recent price movements.
What are the Important Features of the Moving Average?
The moving average (MA) is a widely used indicator in technical analysis.
The moving average (MA) is often used to determine the trend direction or support-resistance levels of a financial asset.
The moving average (MA) is characterized as a trend following or lagging indicator mechanism because it is based on historical price data.
Moving averages help traders generate signals about the buying and selling price of financial assets.
With the moving average, investors get an idea of the risks arising from short-term price fluctuations.