Moving Average (MA): What Investors And Traders Should Know About This Technical Indicator

​If you have been in the stock market for some time, you may have heard of an indicator called the Moving Average, also known as "MA."

What is a Moving Average?

A moving average (MA) is a technical indicator that is commonly used to determine the direction of the trend. By continuously recalculating the average based on the most recent price data, a moving average assists in smoothing out the price data. This helps in reducing the impacts of random short-term variations of the price over a given time.

How does Moving Average work?

• Moving averages are typically calculated to determine the direction of the trend and are sometimes used as dynamic support and resistance levels for a given period.
• Since a moving average is derived using historical prices, it is a lagging indicator.
• The lag increases with the length of the moving average. As a result, a 200-period moving average (which includes prices for the previous 200 periods), will lag significantly behind a 100-period MA.

What are the usage of the Moving Average?

• Faster moving averages are typically employed for short-term trading, while slower moving averages are more often utilized for understanding longer-term market dynamics.
• Moving averages apply to all time frames. Therefore, experimenting and testing several settings over a range of time frames is the best approach to determine which one works for you.
• Likewise, a moving average with a shorter period (faster MA) will be more sensitive to price changes as compared to a slower one.
• A rising moving average indicates the strength, while a falling moving average indicates weakness. Hence, in general, a stock is said to be in an uptrend if its moving average is increasing, whereas in a downtrend if MA is decreasing.
• In general, a stock may show bullish momentum if there is a bullish crossover, i.e. when a faster moving average crosses above a slower moving average.
• Conversely, bearish momentum may be expected on a bearish crossover, which occurs when a slower-moving average crosses below a faster-moving average.