✔️ Information reviewed and updated in December 2023 by Eduardo López
In order to achieve your objectives in trading it is important that you take into account all the tools that you can use to complete your strategies, one of those are indicators such as the moving average.
Technical indicators are add-ons that you can add to your charts that offer a certain advantage in a trade. Through mathematical formulas they offer you a better overview to analyze your strategies.
Most of the indicators are similar to each other, but each one has different functionalities. Typically, traders use several indicators to be able to do a better analysis. Our advice is that you use at least one of each type.
In this article we will tell you a little more about this indicator, one of the most popular stock market indicators among traders.
✨Definition of the Moving Average indicator
This indicator is a way of being able to graph daily prices for a certain period of time. It is very useful as a trend indicator, as it uses the daily closing price of a stock as a data point. Then it must be averaged over a specified period.
Now, everything is easier as modern graphics software can do it. As new price points are plotted on a stock chart, the latter number changes on the moving average. This will make the trend line move.
Short-term moving averages are closer to the last price than long-term moving averages. Traders are more confident in the value shown by long-term moving averages.
✨ What is it for?
It is an indispensable stock indicator, as it is widely used among the most technical traders. They help chart price action in a very simple way, which turns out to be quite useful when dealing with high volatility stocks.
✨Types of moving averages
The types of moving averages most used by traders are:
- Simple: treat all data points as equal.
- Exponential: They give more importance to recent data points.
- Weighted: They focus more on recent data, but more evenly.
✨ How is the moving average calculated?
The simple one is based on "n" days:
MMS = (C (t) + C (t-1) +… + C (t-n + 1)) / n. where 'C (t)' is the price at the close of day t.
The weighted moving average is calculated as follows:
MMP = (P1 x Ct + P2 x C (t-1) +… + Pn x C (tn)) / (P1 + P2 +… + Pn), where 'P1' is the weight and C (t) the price on date 't'.
Lastly, the exponential moving average is a weight weighted moving average.
(CloseDay * exponential) + (Moving average of the day before * (100-% exponential))
✨ How is it interpreted?
When a short moving average goes above a long moving average, then the trend is considered to be bullish. On the contrary, when the short average goes below a long moving average, then the trend is considered to be bearish. Only an average can be used that intervenes on the intersections with the price of the instrument.