Moving Averages

Submitted by Jim Thesiger on 23 September, 2010 - 05:04

Moving average (in short MA) is a kind of indicator which is used for technical analysis in order to show the average value of the price of a security over a specific period of time. Moving averages are normally used to serve various purposes like for defining areas of possible support and resistance, for determining the momentum as well as for smoothing out the noise which occurs due to volume functions.

Moving average data helps a trader to understand whether the price of a particular share is trending up or down. The data can be used for tracking daily, weekly or monthly patterns. Under this system, the average gets updated at a regular basis as the latest data is added with it while the oldest ones are removed. This is why a shorter time frame will display volatility in the price and a longer time frame will provide a steadier picture.

Moving average is considered as one of the simplest kinds of indicators that are used by the investors. For instance, it can be the nine day and twenty day moving average. A trader studies the relative position of the price and their crossovers with respect to the moving averages. Bars, lines or candles are usually used for illustrating the price movements in a chart.

Identifying the Market Trend Based on Moving Averages

Traders may detect a change in the trend based on the cross-over between two moving averages. If the fast MA (9 day) intersects the slow MA (20 day) from below to above, that refers to a bullish trend. On the other hand, if it crosses from above to below then it indicates a bearish market. Sometimes moving averages are used as support or resistance levels for a certain trade.

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