The Moving Average (MA) is a technical indicator that shows the average value of a security’s price over a set period. These averages are usually used to measure momentum and define areas of possible support and resistance. This is one of the oldest technical modern indicators and the most often used indicator in technical analysis.
We could distinguish four different types of moving averages – Simple, (or Arithmetic), Exponential, Smoothed and Linear Weighted. This indicator could be calculated for any sequential data set, including opening and closing prices, highest and lowest prices, trading volume or any other indicator. A common practice is to use double moving averages.
The difference between all these four types of indicators, is when weight coefficients that are assigned to the latest data, are different. If we have simple moving average then all prices of the time period in question, are equal in value. Exponential and and Linear Weighted Averages attach more value to the latest prices.
The usual way to interpret the price moving average is to compare its dynamics to the price action. When the instrument price rises over its moving average, we see a buy signal. Analogically, if the price falls under its moving average, a sell signal appears.
Besides, the moving average may be attached to other indicators. That is where the interpretation of this indicator resembles the interpretation of price moving averages – if the indicator rises over its moving average, that means that the ascending indicator movement will probably continue, and if the indicator falls under its moving average, this will be a signal that it may continue in downward direction.