Moving average or MA is an indicator in technical analysis, which smoothens out the spiked chart of share prices to reveal underlying trends, by plotting the average of past share prices over a specific period of time.
The most common moving average in use is the simple moving average or SMA, which takes the simple average of past prices for a given period.
The other is exponential moving average (EMA). While SMA gives equal weightage to all the past days’ prices in the period taken for averaging, EMA gives more weightage to more recent prices.
The chart shows a 20-days SMAs of an imaginary share. It shows the average prices over the past 20 days for each price point on the chart. The longer the lag (time period taken) the smoother the MA will be.
In the graph the green line indicates the daily share price whereas the yellow line is the 20 day SMA.
MA can be used in technical analysis for determining the support (for buying) and resistance (for selling) price levels. Say, SMAs plotted using two different averaging periods, will yield two smooth lines and can guide the analyst with when to buy or/and sell, with two different reference points using the same price movements and time period (for the main price chart).
Another use of MA is used to determine trends using crossovers. For example it is said to be a bullish crossover when the short-term MA cuts the long-term MA from below, indicating there is an upward trend in the market.
Just the opposite happens with a bearish crossover, when the short-term MA crosses the long-term MA from above, which indicates that there is a downward trend in the market.