A moving average is one of the fundamental tools of technical analysis. The two most popular types are the simple moving average and the exponential moving average.
The simple moving average is calculated by averaging market prices over a given period. For example, the twenty-day moving average would average price levels for the first twenty days of the market. On the following day, the SMA would include the twenty-first day of the market, omitting the first day. All SMA values are plotted on a chart, resulting in a significantly smoothed indicator of overall price behavior. The more periods are taken into account by the SMA, the less the SMA line will reflect minor fluctuations in market behavior, and the smoother the data will be.
The exponential moving average is more complicated, but is calculated by taking the difference between the current price and the previous EMA. This value is multiplied by a set percentage (often dependent on the number of periods taken into account), and the resulting number is added to the previous EMA value. Unlike the SMA, the EMA doesn’t eliminate any previous price levels from consideration when making its calculations, and as such is slightly more responsive at reflecting minor fluctuations in price behavior.
Moving averages are a simple way to see overall price behavior for an asset, and are also used as variables for a number of more complicated technical analysis charts and tools.