What Is a Moving Average? Definition, Calculation & Example

what is moving average

It is a trend-following indicator, which can also be used to determine the underlying momentum behind a trend. The Bollinger Bands are a technical indicator based on moving averages. In the middle of the Bollinger Bands, you find the 20 periods moving average and the outer Bands measure price volatility. Keep in mind, however, that all indicators and oscillators often provide false signals and should thus be used with other technical analysis tools. When all the tools you’ve used indicate the same direction for the market, this increases the probability of the success of the trade.

However, if the divergence is too sharp, then prices are probably reaching an extreme level and are likely to pull back in the near future. Moving Average is a technical indicator that reacts to the trends https://www.bigshotrading.info/ of the financial markets and is used by market experts to predict the direction of an asset’s trend. A moving average crossover can be explained as a moment whereby one moving average crosses over another.

How Moving Average works

Like other trading indicators, moving averages can generate buy and sell signals. For instance, a shorter MA crossing above the longer MA is a bullish signal. On the other hand, if it crosses below, traders take it as a bearish signal. Expert traders use moving averages with other indicators to get more accurate signals and trade entry positions. It is calculated by first adding the closing prices for a given number of time periods and then dividing that sum by the same number of time periods. A simple moving average is calculated by finding the sum of a certain number of closing prices over a set period of time and then dividing it by the number in the series.

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 of the prices involved.

A falling long-term moving average reflects a long-term downtrend. The first day of the moving average simply covers the last five days. The second day of the moving average drops the first data point and adds the new data point . The third day of the moving average continues by dropping the first data point and adding the new data point .

What Is a Golden Cross?

Generally, technical analysts will use moving averages to detect whether a change in momentum is occurring for a security, such as if there is a sudden downward move in a security’s price. Other times, they will use moving averages to confirm their suspicions that a change might be underway. Technical analysis makes you confident in the trend, you should be more inclined to open partial positions based on whatever moving average crossover tends to signal the start of a trend.

The simple moving average is a straightforward technical indicator that is obtained by summing the recent data points in a given set and dividing the total by the number of time periods. Traders use the SMA indicator to generate signals on when to enter or exit a market. An SMA is backward-looking, as it relies on the past price data for a given period. It can be computed for different types of prices, i.e., high, low, open, and close.

Moving average definition

There is also a triple crossover method that involves three moving averages. Again, a signal is generated when the shortest moving average crosses the two longer moving averages. A simple triple crossover system might involve 5-day, 10-day, what is moving average and 20-day moving averages. Because of its length, this is clearly a long-term moving average. Next, the 50-day moving average is quite popular for the medium-term trend. Many chartists use the 50-day and 200-day moving averages together.

  • StockCharts members can screen for stocks based on Moving Average values.
  • Most moving averages are based on closing prices, but they can be based on opening, high, low, or mean prices.
  • Moving average can help you identify areas of support and resistance.
  • A typical example of this would be to combine a 50 day EMA, with a 100 day EMA.
  • It can be computed for different types of prices, i.e., high, low, open, and close.
  • On a daily chart, the 200-period Moving Average is comprised of a series of average closing prices for the past 200 days.

To make a moving average smoother, you should get the average closing prices over a longer time period. Moving averages are typically based on price data, and specifically closing price data. However, this indicator can be applied to other types of price data , volume data, or even other indicators. The example below shows a chart with a 50-day SMA applied to the volume bars, and a 20-day EMA applied to the RSI indicator. The formula for an EMA incorporates the previous period’s EMA value, which in turn incorporates the value for the EMA value before that, and so on.