This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
These provide a smoothing effect to the price data, creating a line that can help aid the visual identification of trends. There are popular choices, such as the 50-day and 200-day moving averages, but in reality the choice will depend on the individual, and on the time frame used.
Like many indicators, moving averages are frequently misunderstood. They are, crucially, lagging indicators, i.e. they move slower than the price. They do not predict the future direction, but rather, tell you what has happened in the past. However, they are very useful, since their direction can help the trader identify whether the market is moving up, down or sideways.
A crossover between two moving averages can signal a change in the price direction, as we can see below in this chart of the Euro Stoxx 50: