Like every indicator, a moving average indicator is used to help us
forecast future prices. By looking at the slope of the moving average,
you can better determine the potential direction of market prices.
As we said, moving averages smooth out price action.
There are different types of moving averages and each of them has their own level of "smoothness".
Generally, the smoother the moving average, the slower it is to react to the price movement.
The choppier the moving average, the quicker it is to react to the price movement. To make a moving average smoother, you should get the average closing prices over a longer time period.
Most moving averages are based on closing prices. A 5-day simple moving
average is the five day sum of closing prices divided by five. As its
name implies, a moving average is an average that moves. Old data is
dropped as new data comes available. This causes the average to move
along the time scale. Below is an example of a 5-day moving average
evolving over three days.
As we said, moving averages smooth out price action.
There are different types of moving averages and each of them has their own level of "smoothness".
Generally, the smoother the moving average, the slower it is to react to the price movement.
The choppier the moving average, the quicker it is to react to the price movement. To make a moving average smoother, you should get the average closing prices over a longer time period.
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