The greater the length of the time period (the lag in the trend), the greater the degree of smoothness in the moving average, however, the lower the price sensitivity of the moving average. Moving averages can be computed for different time periods such as 10 days, 20 days or 200 days. Hence, a moving average is a lagging indicator. It basically shows the price fluctuations in a stock as a single curve and is calculated using previous prices. A moving average is used to interpret the current trend of a stock price (or any asset). In financial markets, moving averages are one of the most popular indicators used in technical analysis. The aim of this exercise is essentially to filter noise and smoothen out the data in order to identify an overall trend in the data. These averages computed on rolling windows constitute a new time series. The subsets of data can explicitly be of a fixed size like simple moving averages or implicitly take into account all past points like exponential moving averages. What is a moving average?Ī moving average is a technique to analyze a time-series of data points by taking subsets of data and computing their averages. In this article, Jayati WALIA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) explains the concept of moving averages and its implementation in financial markets as an indicator in technical analysis of stock price movements.
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