What is a Moving Average?

Moving averages are a widely used analytical tool in trading. They help traders identify trends, support and resistance levels, and generate trading signals. By calculating the average price of a security over a specific period of time, moving averages allow you to focus on the direction of price movement over time. This period could be anything from a few days to several months, depending on the trader's preference and the type of security being analysed. This makes moving average **a powerful tool for making profitable decisions based on accurate analysis of market trends.**

Types of Moving Average

There are several types of moving averages:

1. Simple Moving Average (SMA): The SMA is the most basic type of moving average. It calculates the average price of a security over a specific period of time by adding up the closing prices for that period and dividing by the number of periods.

2. Exponential Moving Average (EMA): The EMA places more weight on recent prices and less weight on older prices. This means that the EMA reacts more quickly to price changes compared to the SMA.

3. Weighted Moving Average (WMA): The WMA also places more weight on recent prices, but unlike the EMA, it places additional weight on higher volume periods.

4. Smoothed Moving Average (SMMA): The SMMA is similar to the EMA, but it uses a different smoothing technique that is designed to eliminate noise in the market. The SMMA is intended to identify the underlying trend more clearly by minimising the impact of short-term price spikes and dips.

5. Hull Moving Average (HMA): The HMA is a more responsive moving average that uses weighted moving averages and a smoothing factor to reduce lag.

6. Adaptive Moving Average (AMA): The AMA is a type of moving average that adjusts its smoothing factor based on market volatility.

Each type of moving average has its own strengths and weaknesses, and the choice of which one to use depends on the trader's preference and the type of security being analysed.

The most commonly used are Simple moving average (SMA) and Exponential moving average (EMA)

Simple moving average (SMA) vs Exponential moving average (EMA)

The main difference between the simple moving average (SMA) and the exponential moving average (EMA) is that the EMA places more weight on recent prices and less weight on older prices. This means that the EMA reacts more quickly to price changes compared to the SMA. As a result, the EMA is better suited for traders who want to take advantage of short-term price movements, while the SMA is better suited for traders who want to identify longer-term trends. Ultimately, the choice between SMA and EMA depends on the trader's preference and the type of security being analysed.

How to build Moving Average on our platform

Open the chart area in top menu and expand the chart you want to analyse

Click on the dots at the top right corner(1) and choose Apply indicators(2)

Choose moving average type (1), time period (2), colour of the line in the chart (3), and click apply (4).

Note: If you click `For all` - it will apply to all charts.

Now you can analyse the chart using a moving average, using it as support and resistance levels or as other trading signals you deem necessary.

Example of trading signals generated by Exponential Moving Average with BMW shares

Advantages of using moving average

In conclusion, moving averages are a powerful analytical tool for traders that can help identify trends, support and resistance levels, and potential trading opportunities. By smoothing out the noise in the market and highlighting the direction of price movement, moving averages can help traders make profitable decisions based on accurate analysis of market trends.

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