Calculating Moving Averages

Moving averages to your aresenal to discover just how much they can improve your trading strategies.

Not sure where to begin? Moving averages are a useful tool for tracking the direction and strength of a trend by capturing specific price data points over a specified period of time to constantly update the average price as it moves along the chart.

The position of the moving averages depends upon the nature of the asset you are looking at.

Conversely, if prices are above a moving average it can generally be considered bullish, as long as prices remain on top and have the backing from other indicators such as the Stochastic Oscillator.

A good introduction to moving averages and your journey to understanding the basic concepts begins with the simple moving average, which is calculated by taking the mean of a given set of values and plotting it on the chart.

Let's say you were looking at a simple 5-day moving average.

5, 2, 3, 5 + 4 + 9 + 7 + 5 / 5 = 6 Ignoring previous datasets from past days and taking only the recent 5 sets, hence the term moving average.

The blue line mapped on the chart is the simple moving average representing 5 days or 5 sets of data points.

There is no perfect solution for your simple moving average setup, analysts usually devise their own strategies, often employing multiple moving averages in order to provide greater understanding and depth to their analysis.

In time you will get to know each type of moving average and their various uses but for now, you should familiarise yourself with the simple moving average, experimenting on different timeframes to see how each chart reacts.