Moving Average
IntermediateA moving average is the average of a set of data points over a fixed number of recent periods, recalculated each period as new data is added and the oldest data is dropped.
Moving averages smooth out short-term fluctuations, making it easier to see underlying trends in data such as share prices, sales figures or economic statistics.
For example, a three-day moving average of a share price that closed at 10, 12 and 14 over three days is 12. The next day, if the price closes at 13, the oldest value is dropped and the new average is calculated from 12, 14 and 13, giving 13.
A simple moving average gives equal weight to each data point. An exponential moving average gives more weight to recent data, so it responds more quickly to changes.
Moving averages are widely used in technical analysis. Traders often watch 50-day and 200-day moving averages of share prices. A price above its moving average may be seen as a sign of an upward trend. When a shorter moving average crosses above a longer one, some traders view it as a buy signal.
Moving averages lag behind the data, because they are based on past values. The longer the period, the smoother the line but the slower it reacts to changes. They are also used in statistics and economics to identify trends and reduce the effect of random variation.
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