Moving
average is a preliminary technical indicator used by the traders for trend
analysis. There are various types if moving averages, but their core purpose
remains the same: to guide technical traders track the market trends of
financial assets by smoothing out
the day-to-day price fluctuations.
Amongst the most common technical indicators, moving averages are used to scale the direction of the current trend. Every type of moving average is a mathematical result that is calculated by averaging a number of past data points. Once determined, the resulting average is then plotted onto a chart in order to allow traders to look at smoothed data rather than focusing on the day-to-day price fluctuations that are inherent in all financial markets.
Simple Moving Average (SMA), is calculated by taking the arithmetic mean of a given set of data values. For example, to calculate a basic 10-day moving average you would add up the closing prices from the past 10 days and then divide the result by 10. For a 50-day average, the same type of calculation would be made, but it would include the prices over the past 50 days and divide its sum by 50.
The reason why it is called a "moving" average and not just a regular arithmetic mean is because the new latest values are taken in to account, the oldest data points must be dropped from the set and new data points must come in to replace them. The data set is constantly "moving" to account for new data as it becomes available.
Amongst the most common technical indicators, moving averages are used to scale the direction of the current trend. Every type of moving average is a mathematical result that is calculated by averaging a number of past data points. Once determined, the resulting average is then plotted onto a chart in order to allow traders to look at smoothed data rather than focusing on the day-to-day price fluctuations that are inherent in all financial markets.
Simple Moving Average
Simple Moving Average (SMA), is calculated by taking the arithmetic mean of a given set of data values. For example, to calculate a basic 10-day moving average you would add up the closing prices from the past 10 days and then divide the result by 10. For a 50-day average, the same type of calculation would be made, but it would include the prices over the past 50 days and divide its sum by 50.
The reason why it is called a "moving" average and not just a regular arithmetic mean is because the new latest values are taken in to account, the oldest data points must be dropped from the set and new data points must come in to replace them. The data set is constantly "moving" to account for new data as it becomes available.
Moving
Average Charts
Once the values of the Moving Average have been calculated, they are plotted on a chart and then connected to create a moving average line. These curving lines are common on the charts of technical traders, but how they are used can vary drastically. The higher the number of closing price taken into account the moving average curve gets smoother.
The simple moving average is very popular among traders as a powerful stock market trading signal,
but like all technical indicators, it does have its critics. Many individuals
argue that the effectiveness of the SMA is narrow since each point in the data
series is weighted the equal, regardless of
where it occurs in the sequence.
Critics argue that the most recent data is
more significant than the older data and should have a greater impact on the
final result. In response to this criticism, traders started to give more
weight to recent data, which has since led to the development of various types
of new averages, the most popular of which is the Exponential Moving Average (EMA).
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