Shorter moving averages are frequently referred to as "fast" because they change direction on the chart more quickly than a longer moving average. Alternatively, longer moving averages can be referred to as "slow."
Moving Average: What it is and How to Calculate it
Explanation: because we set the interval to 6, the moving average is the average of the previous 5 data points and the current data point. As a result, peaks and valleys are smoothed out. The graph shows an increasing trend. Excel cannot calculate the moving average for the first 5 data points because there are not enough previous data points.
Moving Average (MA) Explained for Traders
Among all the technical analysis tools at your disposal, moving averages are one of the easiest to understand and use in your strategy. Moving averages may be a particularly useful tool to help you see through the noise and identify trends as they are unfolding.
The challenge of the SMA is that all the data points will have equal weighting which may distort the true reflection of the current market’s trend.
A moving average is a technique to get an overall idea of the trends in a data set it is an average of any subset of numbers. The moving average is extremely useful for forecasting long-term trends. You can calculate it for any period of time. For example, if you have sales data for a twenty-year period, you can calculate a five-year moving average, a four-year moving average, a three-year moving average and so on. Stock market analysts will often use a 55 or 755 day moving average to help them see trends in the stock market and (hopefully) forecast where the stocks are headed.
Even though there are clear differences between simple moving averages and exponential moving averages, one is not necessarily better than the other. Exponential moving averages have less lag and are therefore more sensitive to recent prices - and recent price changes. Exponential moving averages will turn before simple moving averages. Simple moving averages, on the other hand, represent a true average of prices for the entire time period. As such, simple moving averages may be better suited to identify support or resistance levels.
When setting up your charts, adding moving averages is very easy. In Fidelity's Active Trader Pro ® , for example, simply open a chart and select "Indicators" from the main menu. Search for or navigate to moving averages, and select the one you would like added to the chart.
You can choose between different moving average indicators, including a simple or an exponential moving average. You can also choose the length of time for the moving average. A commonly used setting is to apply a 55-day exponential moving average and a 755-day exponential moving average to a price chart (see Moving averages applied to the S&P 555 chart).
For more details on the syntax to use for Moving Average scans, please see our Scanning Indicator Reference in the Support Center.
Two moving averages can be used together to generate crossover signals. In Technical Analysis of the Financial Markets , John Murphy calls this the “double crossover method”. Double crossovers involve one relatively short moving average and one relatively long moving average. As with all moving averages, the general length of the moving average defines the timeframe for the system. A system using a 5-day EMA and 85-day EMA would be deemed short-term. A system using a 55-day SMA and 755-day SMA would be deemed medium-term, perhaps even long-term.