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The two most popular types of moving averages are:

1. The Simple Moving Average (SMA) - the average (mean) price of a security over a specified number of periods;
2. The Exponential Moving Average (EMA) applies to weighing factors to reduce the lag in simple moving averages.

Price moving averages smooth out prices and make it easier to identify the trend direction. Since past price data is used to calculate moving averages, this price moving average is considered a lagging indicator, or trend following indicator. Price moving averages will not predict a change in trend, but rather follow behind the current trend and they are best suited for trend identification and trend following purposes, not for prediction.

Chart 1: Simple and Exponential Moving Averages

As a rule the price moving averages are used to confirm trends, resistance and support levels as  one of the components of different trading systems. It is recommended price moving averages be used in conjunction with other technical indicators. Using moving averages as part of a trading system to confirm other indicators can greatly enhance this trading system.

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