Definition: Moving average (MA) is an indicator of technical analysis, employed to filter the noise of random fluctuations in the stock prices.
What Does Moving Average Stock Mean?
What is the definition of moving average stock? Moving average helps technical analysts to determine the trend of stocks by taking on the average of a subset of prices. Moving average can be calculated as simple moving average (SMA), which the average price of a security over a number of periods; weighted moving average (WMA), which is the average price of a security using linearly weighted values so that the most recent prices have a greater weight, and exponential moving average (EMA), which is the average price of a security using the most recent values.
So, it practically calculates the average of all prices, but it starts from a specified point. Technical analysts use moving average to forecast long-term trends. As a rule of thumb, they calculate a 50 or 200 day moving average to identify trends in the stock market and support and resistance levels.
Let’s look at an example.
Christopher is a technical analyst. He wants to calculate the moving average of certain stocks over a certain period of times to identify potential buy opportunities. From the client’s portfolio, Christopher will calculate the moving average of stock A from 2012 to 2016 (5 years), the weighted moving average from 2010 to 2016 (7 years), and the exponential moving average from 2007 to 2016 (10 years).
The simple moving average is the average of the years 2012 to 2016. Therefore, (28 + 25 + 31 + 38 + 35) / 5 = 31.4
The weighted moving average is calculated as follows: the number of periods is 7 and their total is 7+6+5+4+3+2+1 = 28. Therefore:
29 x (1/28) + 44 x (2/28) + 28 x (3/28) + 25 x (4/28) + 31 x (5/28) + 38 x (6/28) + 35 x (7/28) = 33.2
The exponential moving average is calculated as follows: the weight attributed to the values is 0.1818 (2 periods over 10+1). Therefore, starting from 2007, the EMA for 2008 is 0.1818 x (SMA 2007 – EMA 2007) + EMA 2007 = 0.1818 x (28 – 25) + 25 = 25.5. The same logic applies to all the following years.
So, the spreadsheet that Christopher has constructed has the following form:
Define Moving Average Stock: MA stock means a trending average as stock prices change over time.