The red line (10 day MA) is closest to the blue line (price curve) and the purple line (50 day MA) is farthest away. As the lookback period increases, the moving average line moves away from the price curve. It can be observed that the 50 day MA is the smoothest and the 10 day MA has the maximum number of peaks and troughs or fluctuations.
A faster MA has less lag when compared to the slower MA.Ĭonsider the chart shown above, it contains the closing price of a futures contract (blue line), the 10 day moving average (red line), the 20 day moving average (green line) and the 50 day moving average (purple line). Moving averages are known to be lagging indicators, they lag behind movements in the price/volume charts. Similarly fast moving averages are also called smaller moving averages.
Slow moving averages are also called larger moving averages as they have a larger subset for computing the average. The moving averages with shorter durations are known as fast moving averages and are faster to respond to a change in trend. These moving averages are slower to respond to a change in trend and are called slow moving averages. This happens as each data point in the subset has lesser weightage when the lookback period is increased, which in turn reduces the variations inherent in the underlying price/volume chart. Larger subsets for calculating moving averages will generate smoother curves and contain lesser fluctuations.
Moving averages help smoothen out the fluctuations, enabling analysts and traders to predict the trend or movement in the price of securities. The price of securities tend to fluctuate rapidly, as a result the graphs contain several peaks and troughs making it difficult to understand the overall movement. In financial markets, it is most often applied to stock and derivative prices, percentage returns, yields and trading volumes.
#EVIEWS 9 MOVING AVERAGE SERIES#
A moving average series can be calculated for any time series. It can be seen that the subset for calculating averages moves forward by one data entry, consequently the name moving average (also called running average or rolling average). Let the average be calculated for five data points (underline denotes the subset used for calculating the average). Consider the example mentioned below to understand the calculation of simple moving averages. by excluding the first element of the previous subset and adding the element immediately after the previous subset to the new subset keeping the length fixed. The subset is then modified by shifting it forwards by one value, i.e. Given a series of numbers and a fixed subset size, the first element of the MA series is obtained by taking the average of the initially fixed subset of the number series. They have a predefined length for the number of values to average and this set of values moves forward as more data is added with time. Moving averages (occasionally referred in this blog post as MA) are the averages of a series of numeric values. Moving averages help traders identify trends and empower them to increase the number of profitable trades by making those trends work in their favour. Few other indicators have proved to be as unbiased, definitive and practical as the moving average. Moving average is one of the most widely used technical indicators for validating the movement of markets.
By Devang Singh What are Moving Averages?