Summary
A Moving Average smooths a series of prices by calculating an average over a selected number of periods. It is commonly displayed as a line over a price chart.
By reducing the effect of short-term fluctuations, a Moving Average can make the underlying direction of a price series easier to see.
Why it matters
Moving Averages are widely used to review trend direction, compare current prices with recent history, and identify changes in momentum. They can also provide a consistent reference line across different securities and time periods.
Shorter-period averages respond more quickly to recent price changes, while longer-period averages are smoother and generally react more slowly.
How it is calculated
A simple Moving Average is calculated by adding the selected prices for a set number of periods and dividing the total by the number of periods.
Simple Moving Average = Sum of Prices over the Selected Periods ÷ Number of Periods
Other types of Moving Average may apply greater weight to more recent observations. The chart settings determine the method, period, price field, and interval used.
How to read it
A price trading above a rising Moving Average may be associated with an upward trend, while a price below a falling Moving Average may be associated with a downward trend. Investors also review crossings between price and an average, or between shorter and longer averages.
These observations are descriptive and should not be treated as automatic buy or sell signals.
Things to keep in mind
Moving Averages are based on past prices and therefore respond after prices have already moved. Short settings can produce frequent changes and false signals, while long settings can react slowly to turning points.
The result depends on the chart interval and selected parameters. A Moving Average may not be displayed until enough historical observations are available.