| "A way of smoothing data to give a clearer indication of the trend in a variable stock or instrument. Moving averages are one of the oldest and most popular of technical analysis tools. A simple moving average is calculated by adding together the closing prices of a financial instrument over a certain number of days and then dividing the sum by the number of days involved. So, for example, the seven day average for a share price would be calculated by taking seven days worth of data, adding them together and dividing by seven. There are lots of ways of interpreting moving averages. The most basic is to treat a change of direction in the moving average as a signal to buy or sell, so if the moving average has been consistently rising and then it falls, that is a signal to sell. The classical interpretation is to compare the moving average with the price of the underlying share and to plot them both on the same graph Ñ before the share price rises above its moving average, buy the share |
