What is a moving Average?

The moving average is one of the most widely used technical indicators because it is versatile and easily constructed. It serves as a device to follow trends in the movement of a currency (or stock). Its purpose is to identify and signal to a technical trader that a new trend, a sustained movement either up or down in the currency, has begun or that an old trend has ended or reversed. The reason trends are easier to see using a moving average is that it acts to smooth the volatility inherent in looking at the price action alone to recognize trends. Overlapped with the price action the moving average produces buy and sell signals to the analyst or trader. The signals have a lag to market conditions, therefore a moving average is a trend following indicator.

Moving average is an indicator used in technical analysis that shows a stock's average price over a certain period of time. It is good to show a stock's "momentum" and it's propensity to move above or below a point. Generally moving average is plotted on a graph alongside the stock's price.

The moving average method is regarded as the typical model in the technical analysis due to its simple structures, This is widely confident in many market participants and the curve just represents the market trend. The trend analysis cannot predict the market movements in the future unlike the Oscillator analysis. You can make use of the moving average for capturing the current market trend as it follows the forex market later.

On the whole, the moving average is a smoothing tool. Low and high prices are obscured and the basic trend of the market is more precisely seen by averaging the price information. But by its very nature the moving average line is behind the market action. A shorter period moving average (3-5 days) would hug the price action more closely than a 40-day moving average. Shorter term moving averages are more influenced by everyday shifts.

In an ordinary moving average, all price data has the same weight in the calculation of the average with the oldest eliminated value as each new value is added. And in the exponential moving average equation as the average is being measured the most recent market action gets greater importance. Still the oldest pricing data in the exponential moving average is never eliminated.

Generally the closing price is used to compute the moving average, however opening, high, low and mid point of the trading range values can also be selected. Several types of moving averages can be calculated. Some analysts believe that a heavier weighting should be given to the most recent data and in an attempt to correct this problem, construct other types of moving avenges such as the linearly weighted and exponentially smoothed moving average. The most common application is the simple moving average as discussed above.

The basis of interpretation is to buy when the securities price moves above its moving average and to sell when the price moves below its moving average. Different lengths of averages are meant to identify different trends. Short trends are often best identified by a 5 to 13 day moving average. Minor intermediate trends are roughly 25 to 50 days. Intermediate trends from 50 days to 100 days and long term trends greater than 100 days. The length of the moving average should match the cycle or trend you wish to follow.

This type of moving average trading system is not intended to get you in at the exact bottom nor out at the exact top. Rather, it is designed to keep you in line with the security's price trend by buying shortly after the security's price bottoms and selling shortly after it tops.

A simple moving average (SMA) is the unweighted mean of the previous n data points. For example, a 10-day simple moving average of closing price is the mean of the previous 10 days' closing prices.

Moving averages provide different options for smoothing data. Data is smoothed in order to help reduce the effect of bar-to-bar price fluctuations and help identify longer term emerging trends. A moving average reveals the general direction and strength of a stock's price trend over a given period. Some of the averaging methods however are not so much "Moving" as they are "Cumulative" (exponential for one).

An oscillator is an extremely useful tool that provides the technical trader with the ability to trade non-trending markets where prices fluctuate in horizontal bands of support and resistance. In this situation, trend following systems such as the moving average do not perform satisfactorily, as many false signals are generated. The oscillator can also be used to provide the technician with an advance warning of short term market extremes, commonly referred to as overbought and oversold conditions. Oscillators provide a warning that a trend is losing momentum before the situation becomes apparent in the price action which is referred to as divergence. As is the case with other types of technical tools there are times when oscillators are more useful than others and they are not infallible.

A filter is any technique used in technical analysis to increase one's confidence about a certain trade. For example, many investors may choose to wait until a security crosses above a moving average and is at least 10% above the average before placing an order. This is an attempt to make sure the crossover is valid and to reduce the number of false signals. The downside about relying on filters too much is that some of the gain is given up and it could lead to feeling like you've "missed the boat". These negative feelings will decrease over time as you constantly adjust the criteria used for your filter. There are no set rules or things to look out for when filtering; it's simply an additional tool that will allow you to invest with confidence.

The moving average can also be used to plot areas of support and resistance. Price action often bounces off a long term moving average in a sign of a continuing trend.

Changes in the upward or downward trend of the stock being measured are identified by the stock price or index crossing over its moving average, rather than a change in direction of the moving average itself. According to the moving average theory, when a stock price moves below its moving average, a change is signaled from a rising to a declining market; when a stock price moves above its moving average, the end of the declining trend is signaled.

To the right technical studies are examined in more detail to provide a sense of conformational evidence for traders of the critical day. Click on any of the terms to take a closer look at a technical discussion on that topic. All formations, patterns, indicators and technical tools fail at various times and so should only be used to build a body of evidence in forming a trading decision rather than being solely relied upon. There are a number of valuable studies that lead to intuitive understandings about price and volume but a strong compliment to technical analysis is an understanding of the trends and changes in the fundamentals and economic activity that ultimately lead valuation levels in the markets.

From 2105 – 105 cal BP, the moving average window is allowed to shrink to the number of remaining points in the data set. The residual is linearly interpolated to the same spacing as IntCal04.

The primary purpose of moving averages is to "smooth" data so that trends are more discernable. They are used to construct market indicators and to assist in interpretation of price charts.

A weighted average is any average that has multiplying factors to give different weights to different data points. But in technical analysis a weighted moving average (WMA) has the specific meaning of weights which decrease arithmetically. In an n-day WMA the latest day has weight n, the second latest n-1, etc, down to zero.

A critical day is an expectation of a reversal of the short trend that immediately precedes the critical day. In the case of the November 7 signal, given to members 3 days before, is an indication that the upward moving trend, recognized at the close of November 6 is expected to reverse direction.

Simple Moving Average (SMA) - This is probably the most commonly used smoothing type. The Simple method gives equal weighting to each price point over the period considered. The SMA value at each bar will be computed by taking the close of that bar, and the close of the previous 9 (Period - 1) bars, adding them together, and then dividing by 10 (Period), to get the average. Each time you add a new price point to the simple MA, you drop the oldest price point. Simple MA's have a memory of only the last X bars (X being the period).