Moving Averages

Moving Averages are the most widespread of technical indicators that are used in trading equities, futures and currencies. Arguably, they are the most successful of the indicators that are out there. At the very least, they are as good as any other indicator. They are really easy to understand and implement. Maybe, that explains the popularity.

As a beginner, it is vital to understand moving averages. We need to understand what they are and how they behave and how profitable they really are. Over the next few posts, I intend to explore this very simple concept and test MA based trading strategies.

Simply stated a moving average is the average value of the last n days of trading. Since this value is different for every trading, it value is 'moving' with time. Plotted against the time axis, it provides smoothed version of the time series under consideration (close, high, low).

Shown above are two moving average curves for COST. In the picture shown above the arithmetic average is used to give us a Simple Moving Average, SMA. You could also use a linearly weighted average (Linear Weighted Moving Average, LMA) or an exponentially weighted average (Exponentially Weighted Moving Average, EMA).