Moving Average

Calculation of Technical Analysis Indicators

A moving average (sometimes shortened to the initials MA) is a method of technical analysis which is used to identify long term, medium term or short term trends by smoothing out the way price movements are graphically represented. Moving averages are normally expressed by way of the number of previous days data which is used to calculate the moving average. As with most technical analysis tools, moving averages can be used for most financial instruments including stocks and shares, currencies, bonds etc.

There are several different type of moving average including exponential, weighted and triangular moving averages. To start to explain how moving averages work in general it's best to concentrate initially on the simple moving average.

Use and Calculation of a Simple Moving Average

As mentioned in the first paragraph, a certain number of previous day's price information is used in calculation of a moving average. Let's take a simple 5 day moving average as an example. To calculate the 5 day moving average of the closing price of, for example, a particular stock, simply add up all the closing prices for each of the past 5 days, then divide that total by 5. Voila - you've got the 5 day moving average just like that. The following day, the new day's price is taken into consideration but but the oldest day drops out of the calculations, and a new MA is calculated. Similar calculations are done to find the 20 day, 100 day MA and so on, just using a different number of days. The Moving Average for longer-term periods (for example the 200 day MA) slows the longer-term trends and movements upwards and downwards are more gradual than the shorter term (eg 10 day) MA.

A way of using Moving averages is to look for times when the stock price crosses a longer-term MA (30 days or above) and use this as a buy or sell indicator. The most popular time period to use for this is the 200 day MA. Alternatively, times when a short-term Moving Average crosses the line of a long-term MA can sometimes be thought of as a buy or sell sign. Moving Averages can also be used in conjunction with other technical indicators to produce buy or sell signals.

As an alternative to the Simple MA, some analysts prefer the Exponential Moving Average, which is calculated using a method which places more weight on more recent data.