What Is a Moving Average (MA)?

In finance, a moving average (MA) is a stock indicator commonly used in technical analysis. The reason for calculating the moving average of a stock is to help smooth out the price data by creating a constantly updated average price.

By calculating the moving average, the impacts of random, short-term fluctuations on the price of a stock over a specified time frame are mitigated. Simple moving averages (SMAs) use a simple arithmetic average of prices over some timespan, while exponential moving averages (EMAs) place greater weight on more recent prices than older ones over the time period.

KEY TAKEAWAYS

  • A moving average (MA) is a stock indicator commonly used in technical analysis.

  • The moving average helps to level the price data over a specified period by creating a constantly updated average price.

  • A simple moving average (SMA) is a calculation that takes the arithmetic mean of a given set of prices over a specific number of days in the past.

  • An exponential moving average (EMA) is a weighted average that gives greater importance to the price of a stock in more recent days, making it an indicator that is more responsive to new information.TRADE

    TABLE OF CONTENTS

    • TECHNICAL ANALYSIS

    • TECHNICAL ANALYSIS BASIC EDUCATION

    Moving Average (MA): Purpose, Uses, Formula, and Examples

    By

    JASON FERNANDO

    Updated March 31, 2023

    Reviewed by

    CHIP STAPLETON

    Fact checked by

    KATRINA MUNICHIELLO

    What Is a Moving Average (MA)?

    In finance, a moving average (MA) is a stock indicator commonly used in technical analysis. The reason for calculating the moving average of a stock is to help smooth out the price data by creating a constantly updated average price.

    By calculating the moving average, the impacts of random, short-term fluctuations on the price of a stock over a specified time frame are mitigated. Simple moving averages (SMAs) use a simple arithmetic average of prices over some timespan, while exponential moving averages (EMAs) place greater weight on more recent prices than older ones over the time period.

    KEY TAKEAWAYS

    • A moving average (MA) is a stock indicator commonly used in technical analysis.

    • The moving average helps to level the price data over a specified period by creating a constantly updated average price.

    • A simple moving average (SMA) is a calculation that takes the arithmetic mean of a given set of prices over a specific number of days in the past.

    • An exponential moving average (EMA) is a weighted average that gives greater importance to the price of a stock in more recent days, making it an indicator that is more responsive to new information.

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    Moving Average

    Understanding a Moving Average (MA)

    Moving averages are calculated to identify the trend direction of a stock or to determine its support and resistance levels. It is a trend-following or lagging, indicator because it is based on past prices.The longer the period for the moving average, the greater the lag. A 200-day moving average will have a much greater degree of lag than a 20-day MA because it contains prices for the past 200 days. 50-day and 200-day moving average figures are widely followed by investors and traders and are considered to be important trading signals.

    Investors may choose different periods of varying lengths to calculate moving averages based on their trading objectives. Shorter moving averages are typically used for short-term trading, while longer-term moving averages are more suited for long-term investors.While it is impossible to predict the future movement of a specific stock, using technical analysis and research can help make better predictions. A rising moving average indicates that the security is in an uptrend, while a declining moving average indicates that it is in a downtrend.

    Similarly, upward momentum is confirmed with a bullish crossover, which occurs when a short-term moving average crosses above a longer-term moving average. Conversely, downward momentum is confirmed with a bearish crossover, which occurs when a short-term moving average crosses below a longer-term moving average.