Tuesday, September 14, 2010

Moving Average (MA) Definition

Below is a short article explaining the definition of a moving average of a stock (presented by Investopedia).

What Does Moving Average - MA Mean?
An indicator frequently used in technical analysis showing the average value of a security's price over a set period. Moving averages are generally used to measure momentum and define areas of possible support and resistance.


Investopedia explains Moving Average - MA
Moving averages are used to emphasize the direction of a trend and to smooth out price and volume fluctuations, or "noise", that can confuse interpretation. Typically, upward momentum is confirmed when a short-term average (e.g.15-day) crosses above a longer-term average (e.g. 50-day). Downward momentum is confirmed when a short-term average crosses below a long-term average.

There are a few type of moving average (MA) and the commonly used type is the simple moving average (SMA). Below is the explanation of a simple moving average and if you need more information, please visit Investopedia.

What Does Simple Moving Average - SMA Mean?
A simple, or arithmetic, moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react.


Investopedia explains Simple Moving Average - SMA
In other words, this is the average stock price over a certain period of time. Keep in mind that equal weighting is given to each daily price. As shown in the chart above, many traders watch for short-term averages to cross above longer-term averages to signal the beginning of an uptrend. As shown by the blue arrows, short-term averages (e.g. 15-period SMA) act as levels of support when the price experiences a pullback. Support levels become stronger and more significant as the number of time periods used in the calculations increases.

Generally, when you hear the term "moving average", it is in reference to a simple moving average. This can be important, especially when comparing to an exponential moving average (EMA).

Another commonly used moving average is exponential moving average (EMA). Below is a short article explaining the EMA and please visit Investopedia for more details.

What Does Exponential Moving Average - EMA Mean?
A type of moving average that is similar to a simple moving average, except that more weight is given to the latest data. The exponential moving average is also known as "exponentially weighted moving average".

Investopedia explains Exponential Moving Average - EMA
This type of moving average reacts faster to recent price changes than a simple moving average. The 12- and 26-day EMAs are the most popular short-term averages, and they are used to create indicators like the moving average convergence divergence (MACD) and the percentage price oscillator (PPO). In general, the 50- and 200-day EMAs are used as signals of long-term trends.

Disclaimer

The content written in this blog is intended solely for purposes of information only and does not mean to provide legal, tax or individual investment or business advice. Readers should consult with expert legal, tax, business and financial counsel before considering any action on the information contained in this blog.