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What is the Moving Average Indicator?

Learn more about important trading and financial terms here. Need more help? Our team is ready.

A moving average is a technical indicator that calculates the average price of an asset over a specific number of periods. As each new period is added, the oldest price is removed, so the average continuously “moves” with the market. 

For example:

  • A 20-day moving average calculates the average closing price of the most recent 20 trading days.

Primarily, the moving average indicator is used to assess “trend direction”. A rising moving average can indicate that prices have generally been moving upward, while a declining moving average can indicate downward price movement. The two major types of moving average indicators are:

Simple Moving Average (SMA)Exponential Moving Average (EMA)
Gives equal weight to each price in the selected period.Gives greater weight to recent prices.Generally, it is more responsive to recent price changes.

What Could be the Potential Moving Average Trading Strategy for Beginners?

To develop a moving average trading strategy, several traders usually:

  • Observe the relationship between price and a moving average

or

  • Compare two moving averages

For example, a shorter-term moving average crossing above a longer-term moving average is a potential indication of changing momentum. 

However, moving averages are based on historical prices and can lag during rapidly changing markets. 

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