Moving Average
- Smooths short-term fluctuations in a data series to reveal the underlying trend.
- Computed by averaging a fixed number of the most recent data points and updating as new data arrives.
- Used for simple forecasting; longer averaging windows generally improve forecast stability.
Definition
Section titled “Definition”Moving average is a technique used in technical analysis to smooth out short-term fluctuations in a data series and to highlight the underlying trend. It is calculated by taking the average of a certain number of past data points, typically over a specified period of time.
Explanation
Section titled “Explanation”A moving average takes the mean of the most recent N observations (where N is the chosen period) to produce a smoothed value. As a new data point becomes available, the oldest point in the window is dropped and the newest point is included, producing an updated average. This filtering reduces the influence of short-term volatility and emphasizes longer-term movement in the series.
Examples
Section titled “Examples”Stock price — 10-day moving average
Section titled “Stock price — 10-day moving average”Closing prices for the last 10 days:
| Day | Closing price |
|---|---|
| Day 1 | $10 |
| Day 2 | $11 |
| Day 3 | $12 |
| Day 4 | $13 |
| Day 5 | $14 |
| Day 6 | $13 |
| Day 7 | $12 |
| Day 8 | $11 |
| Day 9 | $10 |
| Day 10 | $9 |
The 10-day moving average is:
If a new closing price of $8 arrives (Day 11), the moving average is recalculated by dropping Day 1 and adding Day 11:
Sales forecasting — 3-month moving average
Section titled “Sales forecasting — 3-month moving average”Monthly sales for 6 months:
| Month | Sales |
|---|---|
| Month 1 | $10,000 |
| Month 2 | $12,000 |
| Month 3 | $11,000 |
| Month 4 | $13,000 |
| Month 5 | $12,000 |
| Month 6 | $11,000 |
To forecast the next month’s sales using a 3-month moving average (last 3 months: Month 2–4):
The source notes that using only 3 data points may yield a less accurate forecast; using a longer moving average (for example, a 6-month moving average) would take into account all 6 months of data.
Use cases
Section titled “Use cases”- Smoothing short-term fluctuations to reveal the underlying trend (technical analysis).
- Simple forecasting of future values using recent averages.
Notes or pitfalls
Section titled “Notes or pitfalls”- Forecasts based on very short moving averages (e.g., 3 points) may not be very accurate.
- Increasing the length of the moving-average window (e.g., to 6 months) can improve forecast stability by incorporating more data.
Related terms
Section titled “Related terms”- Technical analysis
- Forecasting