Moving Average (MA): Purpose, Uses, and Examples

What is a Moving Average (MA)?

In finance, a moving average (MA) is a commonly used stock indicator in technical analysis. The reason for calculating a stock’s moving average is to help smooth price data by creating a constantly updated database. average price.

By calculating the moving average, the impacts of random short-term fluctuations on the price of a stock over a given period are mitigated.

Key points to remember

  • A moving average (MA) is a stock indicator commonly used in technical analysis.
  • The moving average helps level out price data over a specified time period by creating a constantly updated average price.
  • A simple moving average (SMA) is a calculation that takes the arithmetic mean of a given set of prices over a specific number of days in the past.
  • An exponential moving average (EMA) is a weighted average that places greater emphasis on a stock’s price over the past few days, making it a more sensitive indicator to new information.

Understanding a Moving Average (MA)

Moving averages are calculated to identify the trend direction of a security or to determine its support and resistance levels. Is it trend following or lateindicator because it is based on past prices.

The longer the period of the moving average, the greater the lag. A 200-day moving average will have a much larger degree of lag than a 20-day MA because it contains prices for the past 200 days. The 50 and 200 day moving averages are widely followed by investors and traders and are considered important trading signals.

Investors can choose different periods of varying lengths to calculate moving averages according to their trading objectives. Shorter moving averages are generally used for short-term trading, while longer-term moving averages are more suitable for long-term investors.

Although it is impossible to predict the future movement of a specific stock, the use of technical analysis and research can help in making better predictions. A rising moving average indicates that the stock is in a uptrendwhile a descending moving average indicates that it is in a downtrend.

Similarly, the bullish momentum is confirmed with an uptrend crossing, which occurs when a short-term moving average crosses above a longer-term moving average. Conversely, downward momentum is confirmed by a bearish crossover, which occurs when a short-term moving average crosses below a longer-term moving average.

Types of Moving Averages

Simple moving average

A simple moving average (SMA), is calculated by taking the arithmetic mean of a given set of values ​​over a specified period. A set of numbers, or stock prices, are added together and then divided by the number of prices in the set. The formula for calculating the simple moving average of a security is as follows:













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\begin{aligned} &SMA = \frac{ A_1 + A_2 + \dotso + A_n }{ n } \\ &\textbf{where:} \\ &A = \text{Average over period } n \\ &n = \text { Number of periods} \\ \end{aligned}


SMA=notA1+A2++Anotwhere:A=Average over the period notnot=Number of periods

Plotting 50-day stock prices using a simple moving average might look like this:


Plot a 50-day simple moving average.

Image by Sabrina Jiang © Investopedia 2021


Exponential Moving Average (EMA)

The exponential moving average gives more weight to recent prices in an effort to make them more responsive to new information. To calculate an EMAthe simple moving average (SMA) over a given period is calculated first.

Then calculate the multiplier to weight the EMA, known as the “smoothing factor”, which usually follows the formula: [2/(selected time period + 1)].

For a 20-day moving average, the multiplier would be [2/(20+1)]= 0.0952. The smoothing factor is combined with the previous EMA to arrive at the current value. The EMA thus assigns a higher weight to recent prices, while the SMA assigns equal weight to all values.













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\begin{aligned} &EMA_t = \left [ V_t \times \left ( \frac{ s }{ 1 + d } \right ) \right ] + EMA_y \times \left [ 1 – \left ( \frac { s }{ 1 + d} \right ) \right ] \\ &\textbf{where:}\\ &EMA_t = \text{EMA today} \\ &V_t = \text{Value today} \\ &EMA_y = \text{EMA yesterday} \\ &s = \text{ Smoothing} \\ &d=\text{Number of days} \\ \end{aligned}


EMAyou=[Vt×(1+ds)]+EMAthere×[1(1+ds)]where:EMAyou=EMA todayVyou=Value todayEMAthere=EMA yesterdays=SmoothingD=Number of days

Simple Moving Average (SMA) vs Exponential Moving Average (EMA)

The calculation for the EMA puts more emphasis on recent data points. For this reason, the EMA is considered a weighted average calculation.

In the figure below, the number of periods used in each average is 15, but the EMA reacts faster to price action than the SMA. The EMA has a higher value when the price is rising than the SMA and it drops faster than the SMA when the price is falling. This responsiveness to price changes is the main reason why some traders prefer to use the EMA rather than the SMA.

Image by Sabrina Jiang © Investopedia 2020


Moving Average Example

The moving average is calculated differently depending on the type: SMA or EMA. Below we look at a simple moving average (SMA) of a stock with the following 15-day closing prices:

  • Week 1 (5 days): 20, 22, 24, 25, 23
  • Week 2 (5 days): 26, 28, 26, 29, 27
  • Week 3 (5 days): 28, 30, 27, 29, 28

A 10-day moving average would average the closing price for the first 10 days as the first data point. The next data point would remove the oldest price, add the price from day 11, and take the average.

Example of a moving average indicator

A Bollinger Band® the technical indicator has bands usually placed two standard deviations far from a simple moving average. In general, a move to the upper band suggests that the asset is becoming overboughtwhile a move close to the lower band suggests the asset is becoming oversold. Since standard deviation is used as a statistical measure of volatility, this indicator adjusts to market conditions.

What does a moving average indicate?

A moving average is a statistic that captures the average variation of a data series over time. In finance, moving averages are often used by technical analysts to track price trends of specific securities. An uptrend of a moving average could signify an increase in a security’s price or momentum, while a downtrend would be seen as a sign of decline.

What are moving averages used for?

Moving averages are widely used in technical analysis, a branch of investing that seeks to understand and profit from price movement patterns in securities and indices. Typically, technical analysts use moving averages to detect if a change in momentum is occurring for a security, such as if there is a sudden drop in the price of a security. Other times, they will use moving averages to confirm their suspicions that a change might be afoot.

What are some examples of moving averages?

The exponential moving average (EMA) is a type of moving average that gives more weight to more recent trading days. This type of moving average might be more useful for short-term traders for whom longer-term historical data might be less relevant. A simple moving average is calculated by averaging a series of prices while giving equal weight to each price involved.

What is MACD?

The moving average convergence divergence (MACD) is used by traders to monitor the relationship between two moving averages, calculated by subtracting a 26-day exponential moving average from a 12-day exponential moving average.

When the MACD is positive, the short-term average is above the long-term average and indicates bullish momentum. When the short-term average is below the long-term average, it is a sign that the momentum is down.

What is a gold cross?

A Gold Cross is a chart pattern in which a short-term moving average crosses above a long-term moving average. The golden cross is a bullish breakout pattern formed from a crossover involving a security’s short-term moving average, such as the 15-day moving average, breaking above its long-term moving average, such as the moving average over 50 days. As long-term indicators have more weight, the golden cross indicates a bull market on the horizon and is reinforced by high exchanges volumes.

The essential

A moving average (MA) is a commonly used stock indicator in technical analysis, used to help smooth price data by creating a constantly updated average price. An increasing moving average indicates that the stock is in an uptrend, while a decreasing moving average indicates a downtrend. The exponential moving average is generally preferred over a simple moving average because it gives more weight to recent prices and shows a clearer response to new information and trends.

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