What is a Moving Average?

A moving average is a statistical measurement commonly used as an indicator in trading.  Moving averages measure an average price over a set period of time, commonly 10, 15, 20, 50, or 200 previous periods.  When plotted over time, a moving average can give an indicator of price trend in a security.  Multiple moving averages are often compared simultaneously, and the relationship of different time period moving averages to each other is believed by many traders to provide an indication of likely future price movement.

Often times moving averages are treated as areas of support or resistance.  When these levels break, there is sometimes a large fast push in price movement.  Generally the longer term the moving average, the larger the push created.  Sometimes traders will look for a bounce off of a moving averages as well depending on strategy and if they believe the overall trend is in tact.

Some traders use moving averages in more complex ways as technical price indicators.  An example is a moving average cross.  This occurs when two moving averages of different time periods cross each other.  Sometimes when this happens there is a large push in price movement in the direction of a cross.  A common cross seen as significant to traders is the 50 time period crossing the 200.  Some traders may find significance in different time periods however.

Another more complex use of moving averages is the MACD indicator.  This indicator uses convergence or divergence of moving averages in an attempt to predict future price direction.

Moving averages may be simple or exponential, which applies weighting factors that decrease exponentially.

Whether you are a technical trader or not, it behooves most traders to at least be aware of moving averages as many market participants believe in their ability to provide a level of support or resistance.

 

 


Daniel Major

B.S. Degree in Economics and Finance. Professional day trader. Live and work in Manhattan, NY, NY.

Page Updated: April 17, 2013

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