Moving average

From Financial Literacy Wiki

Moving average is also called rolling average, rolling mean or running average. Given a series of numbers, say the price of Stock X over a period of 1 year, and a fixed subset size (usually the number of trading days), the moving average can be obtained by first taking the average of the first subset. The fixed subset size is then shifted forward by one unit, creating a new subset of numbers, which is averaged. This process is repeated over the entire data series.

For instance, we have the prices of Stock X for the last 30 days (i.e. data series). Assuming that we want to calculate the 5-day (i.e. fixed subset size) simple moving average of the price. To start off, we would take the price of Stock X from Day 1 to Day 5 and take its average to find the first data point of the 5-day simple moving average.

For the second data point of the 5-day moving average, we take the simple average of the price from Day 2 to Day 6, and for the third data point, we take the simple average of price from Day 3 to Day 7 and this goes on till we run out of data points from the first series (i.e. for this example, the last data point for the simple moving average would be the average from Day 26 to Day 30).

The more commonly used moving average int technical analysis is the simple moving average.

Technical investors can create the various moving average by varying the subset size, plot the graph together with trading information such as price and volume traded to get the most useful Moving average.