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By Casey Murphy, Senior Analyst ChartAdvisor.com
In this tutorial, we've covered the basics of moving averages. Here's a brief recap:
- Few technical indicators are as popular and widely followed as the moving average.
- Moving averages come in various forms, but their underlying purpose remains the same: to help technical traders track the trend of financial assets by smoothing out the day-to-day price fluctuations, or noise.
- The simplest form of a moving average is appropriately known as a simple moving average (SMA). It is calculated by taking the arithmetic mean of a given set of values.
- The exponential moving average (EMA) assigns a weighting to recent data because many traders regard this as the major downfall of the SMA.
- Some of the primary roles of a moving average include identifying trends and reversals, measuring the strength of an asset's momentum and determining potential areas where an asset will find support or resistance.
- A moving average can be a great risk management tool because of its ability to identify strategic areas to stop losses.
- Using moving averages can be very ineffective during periods where the asset is trending sideways.
- There are many different strategies involving moving averages. The most popular is the moving average crossover.
- Moving averages are used in the creation of a number of other very popular technical indicators such as the moving average convergence divergence (MACD) or Bollinger Bands®.
- Moving averages won't solve all your investing problems. However, when used judiciously, they can be valuable tools in planning your trading strategy.
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