Moving Average
A moving average (MA) is a technical analysis indicator that helps smooth out price action by filtering out the “noise” from random price fluctuations. It is a trend-following, or lagging, indicator because it is based on past prices. The two basic and commonly used moving averages are the simple moving average (SMA), which is the simple average of a security over a defined number of time periods, and the exponential moving average (EMA), which gives greater weight to more recent prices. Moving averages lag because they are based on past prices; the longer the time period for the moving average, the greater the lag. However, moving averages help smooth out the price action and can be very useful in spotting trends.
History of Moving Average
The concept of a moving average was first introduced by Dow Theory founder Charles Dow in the late 19th century. Dow believed that the average price of a stock over a period of time was the best way to measure the trend of the stock. He used a simple moving average of the closing prices of the stock over a period of nine days, which he called the Dow Jones Industrial Average. Since then, moving averages have become a popular tool among technical analysts and traders.
The exponential moving average (EMA) was developed in the late 1950s by J. Welles Wilder, Jr. Wilder believed that the EMA was a better indicator of a stock’s trend than the SMA because it gave more weight to recent prices. The EMA has since become the most popular type of moving average used by traders and investors.
Table of Comparisons
| Type | Weighting | Lag |
|---|---|---|
| Simple Moving Average (SMA) | Equal | High |
| Exponential Moving Average (EMA) | Weighted | Low |
Summary
A moving average is a technical analysis indicator that helps smooth out price action by filtering out the “noise” from random price fluctuations. It is a trend-following, or lagging, indicator because it is based on past prices. The two basic and commonly used moving averages are the simple moving average (SMA) and the exponential moving average (EMA). Moving averages lag because they are based on past prices; the longer the time period for the moving average, the greater the lag. For more information about moving averages, you can visit Investopedia, The Balance, and Investing.com.
See Also
- Simple Moving Average (SMA)
- Exponential Moving Average (EMA)
- Dow Theory
- Technical Analysis
- Price Action
- Trend-Following
- Lagging Indicator
- Support and Resistance
- Relative Strength Index (RSI)
- Bollinger Bands
