What is a moving average (MA)?
If you are an investor, you may already know that predicting trends in the stock market is not a simple process. While you can’t foresee what the future holds, you can give yourself better odds using research tools and technical analysis.
A moving average (MA) is one of the most popular technical analysis tools for checking price movements over a given period. It is utilised to determine support and resistance levels, as well as identify the trend direction. As it is a lagging or a trend-following indicator, a moving average can help to smooth out price action by filtering out the “noise” from random short-term price fluctuations. Moving averages are used by both short-term and long-term investors.
Where have you heard about a moving average?
You’ve probably heard of the moving average meaning before. These are loved and used by many investors and traders, as they can help to determine various patterns and trends, allowing to build trading strategies based on the received information.
What you need to know about moving averages.
Now that we have moving averages explained, let’s talk about them in detail. As MAs are based on past prices, they tend to lag behind current price action. The longer the period for the moving average, the greater the lag. Therefore, for example, a 100-day indicator will have a much greater degree of lag than a 15-day indicator, as it includes prices for the past 100 days. The shorter the period used to calculate the average, the more sensitive it will be to price changes, and vice-versa. The longer the period, the less sensitive and more smoothed out the indicator will be.
Moving averages are customisable, meaning the user can easily choose any time frame he or she wants when generating the average. The most commonly used time spans are 15, 20, 30, 50, 100 and 200 days.
The length of the moving average used depends on your trading objectives. Longer-term MAs are more suited for long-term investors, meanwhile shorter-term MAs are used for short-term trading. The 50-day and 200-day moving averages are widely used by many, where breaks below and above this indicator seen to be important trading signals.
It is important to mention that there is no such thing as the ‘right’ time span. The choice simply depends on your personal preferences, objectives and trading strategies. One way to find the one that works best for you is to experiment with a variety of time frames until you find the perfect match.
The two most commonly used moving averages are the simple moving average (SMA) and the exponential moving average (EMA).
Find out more about moving averages…
Now that you know the moving average definition, it is time to learn more about different types of moving averages and their implementation. To do so, you can check out free online trading guides provided by Capital.com.