Simple Moving Averages

A simple moving average is a trending indicator that eliminates the volatility of daily price movement and smoothes it out into a line that is plotted on top of the price movement of a security. As with all other technical indicators, a simple moving average is based on past price data and thus lags current price movement, but the information it provides is incredibly beneficial.

You can add up to three simple moving averages on your chart, and you can customize the time frame for each one. For example, if you decided to plot three simple moving averages on your chart, you could select time frames of 30, 50, and 200. That means the first moving average would average out the price movement for the past 30 time periods, the second moving average would average out the price movement for the past 50 periods, and the last moving average would average out the price movement for the past 200 periods.

Using moving averages is the easiest way to determine the trend of a security. If the moving average is pointing up, the security is trending higher. If the moving average is pointing down, the security is trending lower. Of course, the time frame of the moving average determines how responsive, or volatile, the moving average is going to be.

A shorter-term moving average—such as the 30-period simple moving average—is going to be much more responsive than a longer-term moving average—such as the 200-period simple moving average. You can see this in the AAPL chart where the red, 30-period simple moving average moves more than the green, 200-period simple moving average. Looking at this chart, the shorter-term 30-period simple moving average is trending lower while the longer-term 200-period moving average is tending higher.

Now that you're finished reading the text version of this tutorial, watch the video.

Next tutorial: Exponential Moving Averages

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