Moving average

The moving averages is one of the oldest and most popular of technical analysis tools. A simple moving average is calculated by adding together the closing price 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.

To calculate the movingaverage:

1. take the first seven days worth of data and calculating the average value. This is your first point on the moving average chart.

2. Add the prices for Days 2-8 together and divide by 7. This is the second point on your moving average chart. Continue doing this for Days 3-9, 4-10 and so on, each time plotting the average on the chart. You now have a moving average chart.

There are numerous 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, used by most technical analysts, is to compare the moving average with the price of the underlying share and to plot them both on the same graph. Before the share price rises above its moving average, buy the share; when it falls below its moving average, sell the share. That is putting it in extremely simple terms, and for a more sophisticated understanding, read one of specialinvestor.com's recommended books on the subject.

Similar financial terms

Simple moving average
The mean, calculated at any time over a past period of fixed length.

Weighted average life
For amortizing securities, investors do not talk in terms of a bond’s maturity since its principal is made over time. This is because the stated maturity of such securities only identifies when the final principal payment will be made.

Average
The sum of n numbers divided by n.

Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA) is based on a portfolio consisting of 30 blue-chipi stocks in the United States. The weights given to the stocks are proportional to their prices.

Nikkei 225 Stock Average
The Nikkei 225 Stock Average (NIKKEI 225) is based on a portfolio of 225 of the largest stocks trading on the Tokyo Stock Exchange. Stocks are weighted according to their prices.

Weighted average portfolio yield
The weighted average of the yield of all the bonds in a portfolio.

Weighted average remaining maturity
The average remaining term of the mortgages underlying a MBS.

Weighted average maturity
The Weighted average maturity (WAM) of a MBS is the weighted average of the remaining terms to maturity of the mortgages underlying the collateral pool at the date of issue, using as the weighting factor the balance of each of the mortgages as of the issue date.

Weighted average coupon
The weighted average of the gross interest rate of the mortgages underlying the pool as of the pool issue date, with the balance of each mortgage used as the weighting factor.

Weighted average cost of capital
The weighted average cost of capital (WACC) is the expected return on a portfolio of all the firm's securities when debt, equity and tax shields are taken into account. Used as a hurdle rate for capital investment.

Batting average
Percentage of the time you are successful (from baseball).

"The U.S.' largest pension funds have accumulated major-league batting averages in selecting top-performing domestic equity and fixed-income money managers during the last 5 years."
Pensions & Investments , May 2, 1994, p.1.

Termbox
	Digg it!
	Share on Facebook
	Add to Yahoo!
	Add to Google
	Add to del.icio.us
	Add to Reddit
	Add to Spurl
	Add to Furl
	E-mail term to friend!
	Printer friendly version