moving average
The average of the last N closes, recalculated each period; it smooths noise and lags the price.
A moving average is the average closing price across a set number of recent periods, recalculated whenever a new period ends. It smooths some short-term variation, so it is easier to see the broad direction of recent prices.
Because it uses past closes, it lags behind price and changes only after new data arrives. The number of periods changes how smooth and how slow it is. It summarizes history; it does not forecast or guarantee a future move.
Example
For three Northwind Foods closes of $10, $12, and $11, the three-period moving average is ($10 + $12 + $11) ÷ 3 = $33 ÷ 3 = $11. If the next close is $14, the average drops the oldest close and becomes ($12 + $11 + $14) ÷ 3 = $37 ÷ 3, or about $12.33. The price is $14 while the average is about $12.33 because the calculation includes older prices.
Common mistakes
- Thinking the average predicts price. It only summarizes recent closes.
- Forgetting that it lags. A smooth line can react after a move has already happened.
- Comparing averages with different period counts as if they were the same tool. A longer window is slower.
- Treating a crossing as a certain signal. Most people who trade lose money.
Learn it in the course
- Moving averages · Smooth the noise with an average of the last few closes, and see why every average arrives late in a trend and whips back and forth in a range.