FAQ: What are Moving Averages and how can I use them to spot trading opportunities?
by Editorial Staff
Updated: March 28, 2015
Answer: A Moving Average is simply the average value of data over a specified time period. It is used to figure out whether the price of a stock or a commodity is trending up or down. It effectively smooths out the daily fluctuations to provide a more objective way to view a market.
Moving averages can be quite powerful in the hands of a trader or investor who knows how to use them. They help reveal two crucial things that every trader wants to know: whether a trend will continue and when it's about to change.
Although simple to construct, moving averages are dynamic tools, because you can choose which data points and time periods to use to build them. For instance, you can choose to use the open, high, low, close or midpoint of a trading range and then study that moving average over a time period, ranging from tick data to monthly price data or longer.
In addition to determining the trend in a market, Moving Averages can help you identify support and resistance levels, also key indicators for spotting trading opportunities.