A moving average is a technical indicator that market analysts and investors may use to determine the direction of a trend. It sums up the info points of a financial security over a selected period of time and divides the entire by the amount of knowledge points to reach a mean . It is called a “moving” average because it’s continually recalculated supported the newest price data.
It is calculated by adding up all the data points during a specific period and dividing the sum by the number of time periods.
Moving averages help technical traders to generate trading signals.
There are two basic types of moving averages:
1. Simple Moving Average (SMA): The simple moving average (SMA) is a straightforward technical indicator that is obtained by summing the recent data points in a given set and dividing the total by the number of time periods. Traders use the SMA indicator to generate signals on when to enter or exit a market. An SMA is backward-looking, because it relies on the past price data for a given period. It can be computed for different types of prices, i.e., high, low, open, and close.
2. Exponential Moving Average (EMA): The other sort of moving average is that the exponential moving average (EMA), which provides more weight to the foremost recent price points to form it more aware of recent data points. An exponential moving average tends to be more responsive to recent price changes, as compared to the simple moving average which applies equal weight to all price changes in the given period.