Moving average
Family VI · Charts & indicators
Not to be confused with average true range, exponential moving average, moving average crossover.
Moving average is a chart overlay that smooths a price series by averaging the last n closing values and plotting that average as a single line. Because the window slides forward with every new bar, the line responds to price change while suppressing one-bar noise. It is a descriptive statistic of past prices, not a forecast.
Construction
A simple moving average (SMA) of length n at time t is the sum of the n most recent closes divided by n. Each new bar adds the latest close and discards the close from n periods ago, so the average is recomputed rather than extended.
Shorter lengths track price closely and turn quickly; longer lengths lag more but change direction less often. The choice of length is a convention, not a fixed rule, and common settings differ between markets and timeframes.
Worked example
The line rises from 12.00 to 14.00 because the dropped value (10) was below the added value (16). A falling line requires the opposite.
Interpretation and limits
The line is often read as a trend filter: price above a rising average is described as an uptrend, price below a falling average as a downtrend. Crossings of price and average, or of two averages of different lengths, are used as timing signals.
Two properties limit its use. First, it is lagging by construction, since every value in the window is historical. Second, a long window reacts slowly at turning points, while a short window produces frequent reversals. Neither is an error; both follow from the length chosen.
Often confused with
- average true range
- Average true range measures the average size of period-to-period price movement, including gaps, rather than the average price level, so it is plotted in price units as a volatility band and not as a line through the price series.
- exponential moving average
- An exponential moving average applies greater weight to the most recent closes instead of weighting every value in the window equally, so it turns sooner than a simple average of the same length and the two lines separate visibly after a sharp move.
- moving average crossover
- A moving average crossover is the event or strategy defined by one average crossing another, not the average line itself, so it is identified by two lines intersecting rather than by a single plotted value.
See also
- forex technical analysis indicators
- price action
- fundamental analysis
- support and resistance
- technical analysis
- fibonacci