Moving Averages and Exponential Moving Averages Defined

Wondering what an exponential moving average, or “ema”, is? In order to understand what it is, you also have to understand what a simple moving average is. So we’re going to take a moment to go over both the terms and explain both how they are similar and how they are different. By learning about moving averages you’ll become a more informed investor. Remember, when it comes to investing, knowledge is power.

Moving averages are among the most widely used indicators in the world of finance and stock investing. These averages allow you to “filter” out random price movements and to focus on the more stable and valuable trends in a stock or other financial asset. Moving averages allow investors to focus on the more important underlying value of a stock, rather than a surging or dropping price at any given point. This makes them very valuable to investors.

There are two primary types of moving averages, simple and exponential. However, you may find investors and trading firms who have made their own version of the average. If you’re serious about investing you should take the time to familiarize yourself with both types of averages.

The first type is called a simple moving average, which simply measures the price of an asset within a given period of time. If you head to a stock analysis website and click on the “key statistics” of a given stock, you’ll likely find a moving average listed. You should also see a date range, such as a 50 day average or a 200 day moving average.

The second type of moving average is called an exponential moving average, or sometimes a weighted moving average. This average is very similar to a simple moving average, and accomplishes many of the same things. The exponential moving average is different, however, in that it adds more weight to the most recent trading days. This helps you get a better view of how the stock has been performing in recent days, rather than in the past.

Using Moving Averages For Your Investing Strategy

So why should you bother with moving averages anyways? Why not just look at a regular price chart? Moving averages are helpful because they help you determine trends in stock prices. They also help you clear out all the “trading noise” that’s so common in trading markets.

Stock markets are very busy and they tend to see a lot of action. Prices can rise and fall very rapidly and often capriciously. A war might break out in a foreign country, or energy prices might be hit by a major price movement. Interest rates can be dropped or raised on a moment’s notice. On and on the list goes, and each time one of these events happens there is a real chance that stock prices will swing rapidly. That’s why moving averages are so helpful.

While events in any given trading day can have a major impact on stock prices, over a longer period of time these price swings should be smoothed out. A moving average can help you figure what the value of a stock is outside of all of the clutter. And by doing so, such averages can help you identify under-valued stocks. And if you find an undervalued stock, you’ve found a great stock that’s worth buying.

Moving averages can also help you understand trends. For example, if you look at the moving average for Acme Motors and see that the 200 day average is $100, and the 50 day is $110, you’ll know that the stock has been trending upwards.

It should be easy to see that there are a lot of ways to use moving averages.