Moving Average
Type
Trend indicator
Short introduction
Moving averages are among the oldest and by far the most widely used indicators. As a rule, they are abbreviated with "MA". MAs can be calculated in very different ways and can be used in many different ways. In addition to many independent analyses, many other indicators are also based on MAs. MAs form the basis of most technical analyses.
Statement
The term "moving average" expresses the two most important characteristics of the indicator. "Average" means that an average value of the prices is calculated over a certain number of days. "Moving" means that the calculation is moved forward by one day with each new price, that is, the last price is not considered in the calculation.
The average is "trend following" in the truest sense of the word, that is, the MA is of course the simplest (and probably also the most important) of all trend indicators.
In the course of the years, more and more different calculation types were introduced for the MA, for example, the weighted, geometrical, exponential or triangular calculation. Various other ideas were added, such as horizontal or vertical offset.
Formula/calculation
Simple MA:
MAt = (Ct + Ct-1 + Ct-2 + ... + Ct-n+1) ÷n
where:
MAt = Current value of the simple MA
Default calculation of the moving average; all prices are equally weighted in the calculation.
Interpretation
As indicated by smoothing, an MA moving upwards indicates an uptrend, an MA moving downwards indicates a downtrend. In principle, the inertia of MAs increases as the calculation period increases. Shorter analysis periods will return a new signal more quickly. In market phases with shorter trends, you should select shorter periods for the calculations.
In market phases with the strongest trends, you should use longer periods. The disadvantage of short calculation periods is that there are often false signals, whereas with a long calculation period, the signals are often only sent when a large part of the price movement is already upwards or downwards.
Like the calculation of the MAs, the interpretation is very varied. In the following, we present the most common interpretation.
The standard interpretation is the section of the MA with the underlying price development. A crossing up through this line may be used as a signal to buy, a crossing down through this line is a signal to sell. Because this procedure often leads to wrong decisions, many analysts also like to use filters. A typical filter is to define a percentage (about 2% or 3%) by which the MA is exceeded.
Default setting
- Short-term: 5 to 49 days
- Medium-term: 50 to 100 days
- Long-term: More than 100 days
Example: Moving Average (MA 38)
