# Moving Average: What It Is, How It Works, and How to Use It

Moving averages are a widely used technical analysis tool in financial markets that help traders and investors smooth out price data and identify trends. In this article, we’ll cover the basics of moving averages, how to calculate them, different types of moving averages, and how to use them in trading and investing strategies.

Contents

## Introduction

Moving averages are a technical indicator that smooth out price data by averaging the closing price of a security over a specified period. By doing so, moving averages help traders and investors identify trends and potential reversals in financial markets. Moving averages are used in a variety of trading and investing strategies, including trend following, momentum trading, and mean reversion.

## What is a moving average?

A moving average is a mathematical calculation that averages the price of a security over a specified period. The resulting value is plotted on a chart and used to smooth out price data and identify trends. Moving averages are often used in conjunction with other technical indicators, such as the Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD), to generate trading signals.

## Simple moving average (SMA)

The simple moving average (SMA) is the most basic type of moving average. It is calculated by adding up the closing price of a security over a specified period and dividing the sum by the number of periods. For example, a 10-period SMA would be calculated by adding up the closing price of the security over the last 10 periods and dividing the sum by 10.