What is a Moving Average?

A moving average is a widely used technical indicator in financial markets that smooths out price data by creating a constantly updated average price over a specific time period. A moving average is calculated by adding the prices of a security over a set number of periods and dividing the sum by the number of periods.

For example, a 10-day simple moving average is calculated by adding the closing prices of a security over the past 10 days and dividing the sum by 10. This calculation is repeated for each day, creating a new moving average value for each day.

Moving averages are often used by traders and investors to identify trends and potential trading opportunities. There are two main types of moving averages: simple moving averages (SMA) and exponential moving averages (EMA).

Simple moving averages give equal weight to each period in the calculation and are more commonly used for longer-term trend analysis. Exponential moving averages, on the other hand, give more weight to recent price data and are often used for short-term trend analysis.

Moving averages can also be used in combination with other technical indicators, such as the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD), to confirm signals and identify potential buy or sell signals.