What are moving averages?
Under technical analysis, indicators have a crucial role to play. Indicators are pattern-based signals made through price, volume, and/or open interest of a security or contract used by traders who follow technical analysis. Indicators are used to forecast price movements. Some examples of common technical indicators are- moving averages, moving average convergence divergence (MACD), relative strength index (RSI), Bollinger Bands and Exponential moving average (EMA).
The moving average (MA) is an indicator used to find out the direction of a current price trend regardless of the short term price fluctuations. The moving average formula as a technical analysis indicator, finds out price data by updating a regular average price. When the moving average is showcased through a price chart, a single/ flat liner removes any differences caused due to changes in price. They do not forecast the direction of price, instead define the current direction in accordance with the past prices. Therefore, it can be said that moving average is a lagging indicator. It is interesting to know that they are the founding stones for other indicators in technical analysis such as Bollinger bands and MACD.
The two major types of moving averages are simple moving average (SMA) and Exponential moving average (EMA). Simple moving average (SMA) is made by calculating the average price of a security over a consistent time period. Moving averages are typically based on closing prices. As the name suggests, SMA is an average that moves. Exponential moving average (EMA) lowers the price lag by stressing more upon the recent prices. EMA and SMA differ on the pretext that EMA places a greater degree of emphasis on previous data points, making data more inclined towards new information.
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