Moving Averages are price based, lagging (or reactive) indicators that display the average price of a security over a set period of time. A Moving Average is a good way to gauge momentum as well as to confirm trends, and define areas of support and resistance. Essentially, Moving Averages smooth out the “noise” when trying to interpret charts. Noise is made up of fluctuations of both price and volume. Because a Moving Average is a lagging indicator and reacts to events that have already happened, it is not used as a predictive indicator but as an interpretive one for confirmations and analysis.
In fact, Moving Averages form the basis of several other well-known technical analysis tools such as the Bollinger Bands
and the MACD
. There are different types of Moving Averages which all take the same basic premise and add a variation. Most notable are the Simple Moving Average (SMA)
, the Exponential Moving Average (EMA)
, the Weighted Moving Average (WMA)
and the Hull Moving Average (HMA)
about the Moving Average.