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Moving Average: What Does It Mean for Investing?

May 10, 2023 | Research

Moving averages are frequently used by investors and technical analysts when evaluating the price of a particular investment. This data can be combined with other metrics to make informed investing decisions and can even be used to predict the future value of a stock. So, prudent investors should understand how moving averages work and what makes them valuable to investing analysts.

What is a moving average?

A moving average is a calculation commonly used in statistics to show the average value of a data set over a particular length of time. The “moving” part of the term means it is recalculated as new data is received, with the oldest data dropped as new data is added. In investing, a graph of a moving average provides a “smoothed” view of price movements over a given period of time.

There are many varieties of moving averages, but the two most used in investing are ‘simple’ and ‘exponential.’ A simple moving average gives equal weight to each data point. On the other hand, an exponential moving average gives more weight to the most recent data point. However, you typically don’t need to calculate the moving average of a security’s price manually. These measures are so widely used that they are available in many places where investment quotes can be found. For example, MarketWatch includes moving averages in their ‘charts’ section of quotes.

As new data becomes available, moving averages are updated to reflect it. For example, a 5-day moving average would be updated daily by discarding the oldest data point and adding the new closing price. Since moving averages change with the data, they are often reviewed as a chart to visualize trends over time.

Moving Averages in Technical Analysis

Technical analysis is a common method for evaluating securities based on data trends found in charts. An investment’s moving average is one type of data that technical analysts use to make their determinations. By applying the principles of technical analysis to a chart denoting the moving average of an investment’s price over time, you can make determinations about the future price of the security.

Example of Using Moving Averages in Technical Analysis

When employing technical analysis principles, it is often helpful to compare various moving averages. For example, comparing the 50-day, 100-day, and 200-day moving averages of the security’s price can help you analyze trends without emphasizing short-term fluctuations. To visualize how moving averages can be used to study the price of an investment, consider the following chart which shows the 50-day, 100-day, and 200-day moving average prices for Apple Inc. (AAPL) in March.

The daily price change, 50-day moving average, 100-day moving average, and 200-day moving average for APPL stock in March 2023 compared in a chart.

In this chart, you can see that the daily price and the shortest moving average (50-day) are trending up quickly while the longer moving averages (100-day and 200-day) look flatter. In addition, the 50-day has recently crossed above both the 100-day and the 200-day which is often seen as a “bullish” signal.

As you can see, moving averages can help you visualize price trends for a particular investment. However, it is rarely wise to make trades based on only one piece of information. Instead, each security in your portfolio should be chosen after thorough analysis and with your personal situation in mind. Fortunately, an experienced wealth manager can help you find stocks that match your situation and are expected to perform well in the current market.

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