What is the Moving Average?
Definition: The Moving Average is an average price of a financial-assets end-of-day-price over a certain period of days. The Moving Average is an important indicator for technical chart-analysis. The Moving Average allows to identify new market trends. The yesterdays closing price is always the latest value, while the oldest value is skipped for the calculation (therefore "moving"). Most common are Moving Averages over 20 days (MA20), 50 days (MA50) or 200 days (MA200).
Calculation and Use of the Moving Average
For the calculation of a MA20, one has to evaluate the average of the closing-prices from the last 20 days. The Moving Average has a smoother trend then the price-chart, because single day movements have far less importance.
Because of this, the Moving Average shows a better picture of an assets trend. Through adding a Moving Average to a price-chart, one can easily see, if an asset is traded above or below the average price of the last days.
Important trend signals occur, if a 50 day MA crosses a slow 200 day MA. If the MA50 crosses the MA200 above, traders call it a "Golden Cross", an important buy signal. If the MA50 crosses the MA200 below, it is a "Death Cross", a sell signal. If the market goes sideways, a lot of wrong signals can occur, because the Moving Averages cross each other a lot without a new trend in sight.
Example Moving Average
Below an example of Moving Averages in a AUD/USD Currency Candlestick-Chart with three Moving Averages: a fast MA20 (blue), a medium MA50 (pink) and a slow MA200 (orange).
The "Death-Cross" sell-signal from the 21st of March proved to be correct: the new down-trend continued thereafter.