What is Moving average technical indicator ?
Moving average is a technical indicator overlaying price charts. Moving average is a tool widely used by technical analysts and traders. Some traders find moving averages to be constructive and dependable.
There are several types of moving averages and their goal is the same, to trace and confirm market trends. Moving averages is the averaging of prices and smoothing out the period-to-period price movement.
The main objective of moving averages is to determine the direction the current trend is heading, uptrend or downtrend. Besides determining trend directions, moving averages are also use as support and resistance. Moving averages uses math by utilizing a certain number of historical prices. After calculation, the moving average is then plot over the price chart as a line chart. Moving Averages can be used for all time frame, from tick chart to yearly chart.
The most commonly used moving averages are the Simple Moving Average and the Exponential Moving Average.
Simple Moving Average
The most common type of moving averages is the Simple Moving Average. Simple Moving Average calculation is the easiest among the moving averages.
First, determine the number of period to be used for the Simple Moving Average. If we are using a 20-day Simple Moving Average, we sum up the last 20 days’ closing prices only and divide by 20. The result is the 20-day Simple Moving Average for today. After each closing, we have a new Simple Moving Average value to be plot over the price chart.
The same calculation applies to any period of Simple Moving Average, for 30-hour Simple Moving Average will be the sum of last 30 hours’ closing prices divided by 30. The value plotted on the chart as data points and then connects in order to form a line over the price chart.
The number of period used widely depends on each individual trader. The longer the period used the smoother the Simple Moving Average line will be but the more lagging it will be. The shorter period use tends to have more zigzag lines and less lagging.
Exponential Moving Average
Exponential Moving Average is another type of moving averages commonly used besides the Simple Moving Average. Exponential Moving Averages reacts faster to price changes as compared to the Simple Moving Averages. Exponential Moving Averages adds weight to the current prices. The weight is to trim down lagging in the moving averages. The weight varies depending on the period being used, the longer the Exponential Moving Average period the less weight is used. The weight uses a multiplier in calculating the Exponential Moving Average that smoothes the Exponential Moving Averages.