What is a Moving Average?

A moving average is a technical indicator that market analysts and investors may use to determine the direction of a trend. It sums up the data points of a financial security over a specific time period and divides the total by the number of data points to arrive at an average. It is called a "moving" average because it is continually recalculated based on the latest price data.

WHY MOVING AVERAGES ARE POPULAR

Moving averages are simple to use and can be effective in recognizing trending, ranging, or corrective environments. Often traders will use more than one moving average because two moving averages can be used as a trend trigger. In other words, when the shorter moving average crosses above the longer, slower moving average, this can be viewed as a cue to enter long. The long trading bias remains until the moving averages reverse or the target is hit.

Advantages and Disadvantages

The main advantage of the SMA is that it offers a smoothed line, less prone to whipsawing up and down in response to slight, temporary price swings back and forth. The SMA's weakness is that it is slower to respond to rapid price changes that often occur at market reversal points. The SMA is often favored by traders or analysts operating on longer time frames, such as daily or weekly charts.

The advantage of the exponential moving average is that by being weighted to the most recent price changes, it responds more quickly to price changes than the SMA does. This is particularly helpful to traders attempting to trade intraday swing highs and lows since the EMA signals trend change more rapidly than the SMA does.

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