Candlestick Trading Blog

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The moving average (MA) is a technical indicator used in technical analysis that shows the average value of a security's price over a set period of time. They come in many forms, but the general use is to track the trends of financial assets by smoothing out the price fluctuations of daily price data, otherwise referred to as "noise." The MA is a mathematical equation that results from calculating an average number of past data points. Once this average is determined, it is then plotted onto a chart that traders then use to identify trends (trend analysis). This average is also used to measure the strength of an asset's momentum and define areas of an asset's potential support and resistance.

The MA is used to identify support and resistance levels. The support level is the level at which most buyers typically enter the stock, and it reverses at the support level, or in other words, the support level is confirmed when it does not fall below its historical support price level. It the stock does fall below the historical support level then the support level is violated. The resistance level is quite the opposite. The resistance level is the stock price in which a stock can trade, but the price in which it cannot surpass for a set amount of time.

There are three types of averages that we will discuss in today's article that are used in stock market technical analysis.

Simple Moving Average (SMA)
This MA is calculated by taking the sum of all past moving prices over a set time frame and dividing the result by the number of prices used in the calculation. In other words, it is the average stock price over a certain period of time. Many investors who study stock technical analysis prefer to use other MA types because they think that the most recent data is more important than past data.

Exponential Moving Average (EMA)
This MA is calculated by applying a percentage of today's closing price to yesterday's MA value. This method puts more emphasis on recent data and less emphasis on past data than the simple MA method. This MA method is more responsive to newer information and is therefore the MA of choice of many investors.

Weighted Moving Average (WMA)
This MA is also designed as the EMA to put more emphasis on recent data and less on past data and it is calculated by multiplying each of the previous day's data by weight. This MA method is evidenced to produce better volatility estimates than the SMA.

Continue to research the MA as well as other technical analysis tools and indicators to see what works best for you. You should also study the use of technical analysis charts as well as technical analysis with candlesticks.