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Moving Average Definition

Dictionary of Financial Terms

The simple moving average of a security or a commodity calculates its average price for a set length of time to the present and then each successive day, drops the price from the earliest date and adds the one from the latest day. This creates a smoothed price trend line, which is an indicator used in technical analysis.

If the moving average is headed down and the stock price drops below the moving average, this may signal it's time to sell. Vice versa, if the moving average is headed up and the stock price rises above the moving average price, this may be a buy signal. Technicians use other indicators, though, to verify the direction of stock movement to avoid acting upon a misleading signal.

While any time interval may be used, frequent time spans for stocks are 10, 30, 50, 100 and 200 days. Shorter time periods are more sensitive to price changes. Longer periods are less sensitive and smooth the moving average out more.

Which daily price to use in the calculation must also be defined; closing price is the most common, but technicians may chose a variation, such as the sum of the day's high and low prices divided by two [(daily high price + daily low price)/2].

A weighted moving average gives more importance, or weight, to data closer to the present. It will change direction faster than the simple moving average.

Definitions of Financial Terms

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