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Moving averages are one of the most popular indicators used in the
technical analysis.
Moving averages smooth out data, which is especially helpful in volatile
markets.
The two most popular types of moving averages are:
- The Simple
Moving Average (SMA) - the average (mean) price of a security over a
specified number of periods;
- 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.
