Home > Technical analysis > Indicators and oscillators > Moving Average (MA)
Moving Average (MA)
The MA indicator (Moving Average indicator) is one of the oldest technical modern indicators and the most often used indicator in technical analysis.
A moving average is an average of a shifting body of data, as seen from its name. For example, a 10-day moving average is got by adding closing prices for the last 10 periods being measured and dividing by 10. The term "moving" is used as only the last 10 days are used in the measurement. That is why the data body is averaged shifted forward with every next trading day.
The moving average line will be placed directly in the price-shifting chart. The moving average is measured with a definite predefined period. The sensibility of the moving average is weaker if the period is longer. The probability of false signals is higher if the period is shorter.
Overall, the moving average is a smoothing tool. Low and high prices are obscured and the basic trend of the market is more precisely seen by averaging the price information. However, by its very nature the moving average line is behind the market action. A shorter period moving average (3-5 days) would hug the price action more closely than a 40-day moving average. Shorter-term moving averages are more influenced by everyday shifts.
Moving Average demonstrates the average value of a security's price in a time frame. The average price shifts up or down when the security's price shifts. There are 5 popular types of moving averages: simple (or arithmetic), variable exponential, weighted, and triangular. You can measure moving averages on any data series comprising a security's open, volume, high, low, close, or any other indicator. The basic distinction between MA variants is the weight, which refers to the latest data.
Simple moving averages provide the same weight to all the prices. Triangular averages provide more weight to prices in the middle of the time period. Exponential and weighted averages provide more weight to recent prices.
To interpret a moving average usually you should just compare the links between a moving average of the security's price with the security's price itself. If the security's price rises above its moving average a purchase signal is generated. If the security's price shifts below its moving average a sell signal is generated.
In other words, the interpretation of an indicator's moving average is the same as the interpretation of a security's moving average. Once the indicator moves below its moving average, it means a long-lasting downward movement by the indicator, and if the indicator moves above its moving average, it means a long-lasting upward movement by the indicator.
The MACD, Price ROC, Momentum, and Stochastics are among the indicators, which are best suited for usage with moving average penetration systems. Some indicators, such as short-term Stochastics, change so erratically that it is difficult to see their real trend. If you want to see the basic trend of the indicator more than its everyday changes, you can erase the indicator and then placing a moving average of the indicator.
By placing a short-term moving average (2-10 days) of oscillating indicators such as Stochatics, the 12-day ROC or the RSI whipsaws can be reduced, at the expense of slightly later signals. For instance, it is possible to sell only when a 5-period moving average of the Stochastic Oscillator moves below 80 rather than selling when the Stochastic Oscillator falls below 80.