However, note that the moving average will always lag the price increase or decrease since it is including earlier price data that drags it down or up, respectively, relative to the latest price. The opposite is true for a stock that is decreasing in price over time. All three moving averages operate on a sliding window basis – that is, the moving average slides along the price data such that at each new calculation the oldest data point is dropped from the moving average and the next most recent data point is added to the moving average.Īs a result, a stock that is increasing in price over time will have a moving average that also increases, since older, lower price points are dropped from the calculation as newer, higher price points are added in. There are a variety of different moving averages used by traders, but by far the most widely used are the simple moving average (often abbreviated SMA), weighted moving average (often abbreviated WMA), and exponential moving average (often abbreviated EMA). Moving averages can also be used to identify levels of price support and resistance, which can be useful for confirming breakouts predicted by other indicators. In contrast to other popular indicators, moving averages do not predict future price action, but rather make it easier to identify trends in recent or historical price data.
Moving averages are a lagging or trend-following indicator since they are calculated from previous price data. Moving averages smooth price action to make it easier to visualize trends, help to filter out noise of random price fluctuations, and can be used to identify levels of support and resistance. Moving averages are among the most commonly used indicators in technical analysis and one of the primary indicators that nearly every trader has overlaid when studying a stock’s chart.
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