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Moving average definition

What is a moving average?

A moving average is a technical indicator that combines price points of an instrument over a specified time frame, and divides by the number of data points, to give you a single trend line. It is popular amongst traders because it can help to determine the direction of the current trend, while lessening the impact of random price spikes.

A moving average will enable you to examine the levels of support and resistance, by analysing the previous movement of an asset’s price. It is a measure of change that trails the previous price action of an asset, assessing the history of market movements to determine possible future patterns. A moving average is primarily a lagging indicator, which makes it one of the most popular tools for technical analysis.

Calculating an MA requires a certain amount of data, which can be a large quantity depending on the length of the moving average. For instance, a ten-day MA will require ten days of data, while a one-year MA will require 365 days’ worth. A 200-day period is a very commonly used timeframe for MA.

The indicator is described as ‘moving’ because the introduction of new figures will replace old data points and ‘move’ the line on the chart.

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Examples of a moving average

There are two main forms of moving average: simple moving average and exponential moving average.

A simple moving average (SMA) is the most basic MA, which is just a straight calculation of the mean price of a set of values over a given time periods. If you were to calculate the SMA for a ten-day period, you would take the values of the last ten days and divide the result by ten.

Let’s say that the last ten data points of an asset were: 80, 81, 81, 82, 80, 82, 89, 82, 82 and 83. The moving average would add these figures together and divide by ten, resulting in an average of 82.2.

The second type of MA is an exponential moving average, which gives more importance to recent prices to make the data more responsive to new information.

Most trading platforms will do the calculations for moving averages automatically. With IG, you can access moving averages on our charts, as well as other technical tools like Bollinger bands and RSI. To use them, all you need to do is click the ‘indicators’ icon at the top of the chart and select moving average.

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