Moving average is one of the more common technical indicators being used in trading. They are popular tool used by traders to measure momentum. Although there can be many forms of moving averages, they all serve the same purpose. It is to smoothen out price data in order to determine whether there is a likelihood of a certain trade to continue.

Trading Tool

Moving averages have become quite a popular trading tool that traders commonly use. There are several other trading indicators developed and created to help traders. Some may have become more popular than others. But only a few of such indicators have proven to be objective, reliable and useful to traders such as the moving averages.

Primary Usage

The primary use of moving averages it to gauge the direction of a current trend. Although there are various types of moving averages, all of them is calculated as a result of averaging a number of past data points. Once a moving average is determined, it is then being plotted into a chart to allow traders to see a smoothened out data rather than depending on the daily price changes in the markets.

Types Of Moving Averages

The most basic type of moving average is aptly called simple moving average or SMA. It is calculated by taking the arithmetic mean of a given set of data values. A basic 10-day simple moving average is calculated by adding up the closing prices of a stock or security for the past 10 days and then dividing the result by 10. the same process goes with a 50-day or 100-day simple moving average.

Another type of moving average is what is known as exponential moving average or EMA. This is a type of moving average that gives more importance or weight to recent data values as a means to keep the moving average more updated to recent changes. Its calculation may be more complex than what is used for the simple moving average. EMA’s become more sensitive to recent price changes and may be more responsive to new information as they come.