Moving Averages

A moving average is an average of a fixed number of consecutive values or measurements, which is updated at regular intervals. It's common to plot moving averages on a line graph in order to track trends. The values are connected to create a moving average line. As such, moving averages are able to smooth temporary fluctuations in a series of data measurements and make it easier for you to spot trends.

Determining a moving average is like taking a sample of a constantly changing stream of information. As more information is added to the data set, the average "moves" to accommodate the new data. This is the fundamental difference between moving averages and regular averages, which focus on static data sets. Using moving averages ensures that only the current information is being accounted for, and that values are interpreted in the context of their recent history.

Moving averages are especially helpful in volatile business environments like the trading of stocks and foreign currency exchange. Moving averages are especially helpful in volatile business environments like the trading of stocks and foreign currency exchange. Always remember, however, that moving averages are lagging indicators. This means that they can indicate trends once they've begun to occur – but they don't predict new trends. Moving averages can indicate a downward trend or an upward trend.

You can usually identify a stock as being in an upward trend if the price is above a moving average and the average is sloping upward You can usually identify a stock that is in a downward trend if the price is below a moving average and the average is sloping downward.

Calculating moving averages To calculate a simple moving average, you first gather a series of values, also called data points, from a selected period. You then calculate an average in the usual way – you add the selected data points and divide by the number of data points. Next you can calculate a new moving average. To do so, you drop the first data point you previously used and add the next data point in the series in its place, before repeating the calculation. You can continue doing this for each new data point in the series.

There are three important rules you need to remember when you calculate moving averages. First all moving averages are calculated based on a series of measurements made during successive time periods. It could be one measurement per day, for example, or any other regular interval.
Second, you can't calculate moving averages until you've got a minimum number of data points. For example, a five-measurement moving average can't be calculated until there are at least five measurements worth of data.

Third the average keeps "moving" – that is, you drop the first and add the next data point in successive calculations. Keep in mind that the moving average always averages the same number of data points each time.

A moving average is an average of a set of consecutive data points in a series that's updated at regular intervals. You can plot moving averages on a chart and connect them to get a smooth average line. This makes it easier to identify trends. To calculate a moving average, you first gather a relevant subset of data points, add them, and divide them by the number of data points you added. To calculate the next moving average value, you drop the first data point in the subset and replace it with the next consecutive value in the larger data set, before repeating the calculation. You can continue doing this until you've used all the available data points.