What is Moving Average?

A moving average indicator is a simple tool used by traders to help then make better decisions when it comes to buying and selling stocks. This indicator averages the price of stock over a period of time (selected by the user), giving traders an idea of what the stock has been doing recently.

The period of time that is used calculate a moving average can also impact its usefulness. A shorter timeframe will be more responsive to recent price changes, but it can also generate more false signals. A longer timeframe will smooth out the price action and filter out some noise, but it will also lag behind current price action.

The most common period for moving average indicator are 10 days, 20 days, 50 days, 100 days, 200 days. These time periods can be changed depending on trader’s preferences. The 50-day and 200-day moving averages are the most popular among long term investors. In contrast, 10-day and 20 day moving averages are more popular among short-term traders.

Types of Moving Average-

Traders and investors use many moving average types and variations to track the direction of a security’s price. Each type of a moving average focuses on a different metric, such as closing price, trading volume, or opening price.

The most common moving averages (MA) are the simple moving average (SMA), exponential moving average (EMA) and weighted moving average (WMA).

The simple moving average (SMA) is calculated by taking the arithmetic mean of security’s prices over a given period of time. The SMA is considered to be lagging indicator because it is based on past prices.

The exponential moving average (EMA) gives more weights to recent data points, which makes it more responsive to recent prices changes than the SMA. The EMA is also a lagging indicator.

The weighted moving average (WMA) is similar to the exponential moving average but gives more weight to the most recent data points. The WMA is leading indicator because it predicts future price movements.