Stock market players have no shortage of historical data to help them make transaction decisions. One of the most useful — and deceptively simple — is the moving average of stock prices.
Moving Average Stock
What It Is
A stock moving average is an analytical instrument for investors. They use it to determine the best price points for buying or selling their shares.
A stock moving average is exactly what it sounds like. It’s the average price a share costs in a given security over a specified time. It could be measured in minutes, hours, days, weeks, or months. Yearly moving averages, while certainly calculable, aren’t typically very useful. Investors choose what time range and unit are most relevant for their investment situation.
The “moving” part of a moving average stock refers to its “rolling” nature. If you’re measuring a stock’s six-hour moving average at 3 pm, you’re figuring out how much it moved between 9 am and 3 pm. When you update the average at 4 pm, you’ll drop the 9 am data and start at 10 am.
Why Investors Use It
In the stock market, long-tail analysis is very important. Investors need to look beyond current, limited events. They need to get a more general sense of the ways that security prices change over time.
Sudden, dramatic rises or falls in a stock’s value don’t necessarily reflect its true worth. Look no further than the GameStop incident of January 2021 to understand this. Reddit investors bought massive amounts of the security to inflate GameStop’s share price, and it went from $17.69 on January 8 to $325.00 on January 29.
But this deliberate manipulation of share price didn’t reflect the fundamental value of GameStop — it was a temporary, albeit amusing spike that went straight back down to $45.94 by mid-February.
Moving average stock prices filter those aberrant price jumps and falls out of the equation. They separate random, short-term price movements from more dependable, realistic trends. Investors watch the moving average in stock markets to find the right points to buy and sell to increase their profitability.
Another reason that the moving average is widely consulted is that it’s easy to understand. It’s straightforward and easily calculated. You could even explain it to the average elementary school student fairly quickly.
How Moving Average Stock Data Works
The moving average in stock market data is updated according to the unit of time it’s based on. A 200-day rolling average changes every single day; a six-month moving average updates every month.
The longer a time that the moving average covers, the more the result will lag. This makes sense: A moving average that covers six months will change less dramatically than one that covers six weeks. Similarly, a 200-day moving average will change less than a 100-day average because there are fewer data points to consider.
This aspect of moving average stock data is important because different investors use different ranges and price points. If you’re a short-term investor or a day trader, you’ll rely on immediate, sudden price jumps to generate more profit (again, think of GameStop). This means that you’ll use a much smaller range of data — 5 days, 5 hours, or even 30 minutes — on the moving averages you calculate.
Conversely, if you’re a more passive investor who depends on steady, stable, long-term growth, the moving averages that mean the most to you have longer “tails.” You’ll want to see how much a company gains or loses over 100 days, 6 months, or one year.
You can experiment with many different ranges of stock moving average data to see what model works best for you.
Different Kinds of Moving Average Stock Data
There are a few ways to compute a stock’s moving averages. Two of them are used the most by stock analysts.
Simple Moving Average (SMA)
The simple moving average is, as its name implies, the easiest kind to understand and compute. It’s the basic average of a stock’s price over a given time. That’s all there is to it.
To calculate the SMA, you just need to add all of the stock prices at each time point, then divide the sum by the number of time points considered. It’s exactly like computing the average of anything.
For example, say you’re figuring out a company’s five-day rolling average closing price from Monday to Friday. During that period, the share price looked like this:
- Monday: $24.49
- Tuesday: $24.64
- Wednesday: $26.32
- Thursday: $25.17
- Friday: $24.98
Add all of those prices up, then divide the total by 5 (the number of days in the computation):
- $24.49 + $24.64 + $26.32 + $25.17 + $24.98 = $125.60
- $125.60 ÷ 5 = $25.12
The average stock price during those 5 days was $25.12.
The following Monday, you’ll compute a new 5-day average by lopping off the first day’s closing price and adding the latest closing price. Let’s say it closed at $25.34. Your new data set would look like this:
- Tuesday: $24.64
- Wednesday: $26.32
- Thursday: $25.17
- Friday: $24.98
- Monday: $25.34
That totals $126.45. Dividing it by 5, you get a result of $25.29. The moving average moved up by 17 cents.
Hopefully, it’s easy to see how a moving average is a more valuable tool in finding a trend than just looking at a graph of each day’s closing price. With a rolling average, it’s easier to get a sense of a stock’s overall momentum by factoring out “freakish” fluctuations. It’s especially useful in assessing long-term value.
Exponential Moving Average (EMA)
The SMA doesn’t weigh any single data point more strongly — each point is simply added and divided using very basic math. The exponential moving average, however, gives increased importance to the most recent stock price movements.
The complete formula for determining an EMA is a little complex; if you’re interested, the Investopedia entry about EMA breaks it down. The gist is that the EMA takes the most recent data points and weighs them a bit more heavily than older data points.
For example, in a 20-day simple moving average, each day has the same weight as any other day — all the days from Day 1 to Day 20 count 5% toward the final calculation.
On an EMA calculation, though, Day 20 gets a slightly higher weight than the earlier 19 days. The resulting graph looks kind of like the SMA, except you’d see steeper “reactions” on the EMA chart. It would rise more sharply in response to recent price hikes and drop more steeply in response to recent drops.
Since the EMA is more attuned to current and very recent fluctuations in the stock prices, it’s generally the moving average of choice for short-term investors and day traders. Their trading style relies on charting more up-to-the-minute stock price changes than an long-term, “set it and forget it” investor does. The EMA can be useful in deciding when to execute an immediate or same-day trade.
Moving Average Stock Data Explains Share Value
Investors look at stock movements to determine whether a commodity has a positive or negative momentum going for it. They typically combine two different moving average ranges to arrive at that information, looking for “crossover” points.
For example, say you have two different moving average ranges for a certain stock: One that measures the average over the last 200 days and another that just covers the last 30 days.
If you were to look at the moving average as a line graph, the 200-day moving average would be more level and consistent than the 30-day average. If you combined the two charts into one graph, you would see certain points where the 30-day average “crossed” the line of the 200-day average.
These “crossover” points are hints about which direction the stock is headed. If there’s a point at which the 30-day average goes over the 200-day line and that indicates that the market’s feeling bullish about the stock and giving it positive momentum. That’s the point — called a “golden cross” — you might want to buy into a stock.
The opposite is true as well: If the 30-day average appears to be going below the 200-day average, investors appear to have soured somewhat on the stock and are feeling bearish about it. Its momentum is headed downhill, and some shareholders sell their shares at that crossover point, which is glumly known as a “dead cross.”
One slight downside to moving average stock data is that it’s based entirely on historical data. It is not — in and of itself — a prognosticator. It’s great for examining medium- to long-range trends, but especially in times of wild market instability and up-and-down price action, it may not offer meaningful information about future potential.
But that’s how all stock market indicators are. No single metric can tell you everything you need to know about a commodity’s true value; you need to use a combination of research and valuation tools to get educated. Moving average stock price data, even with its limitations, can contribute a lot of meaning to stock analysis.
Gorilla Trades
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