This kind of tool is commonly applied in technical analysis to reveal averages prices over a specific time. Such is essential to flatten price inconsistencies and to identify trend direction and strength. 


The principles used in analyzing moving average curves are the following:

  1. The direction of a moving average curve is indicative of the prevailing trend.
  2. False signals tend to dominate the chart during low-period averaging, while a long period tends to struggle.
  3. The sensitivity of the curve is dependent on the averaging period. For a highly sensitive curve, one should minimize the period of averaging.  For a low sensitive curve, an averaging period should be increased. 
  4. Average curves are essential in trending environment. 


  1. A strong buy signal is expected to show up once the price overlaps from below its rising moving average curve. More so, a strong sell signal will appear if the price overlaps from above its falling average curve. 
  2. A weak buy signal is expected to show up once the price overlaps from below its falling moving average curves. More so, a weak sell signal will appear if price crosses from its rising moving average curve. 


  1. When a rising lower-period curve overlaps from below another rising longer period curve, it denotes a strong buy signal. However, when a falling lower-period curve is overlapping from above another falling longer-period curve, it denotes a strong sell signal. 
  2. When a rising lower-period curve overlaps from below another falling longer-period curve, it indicates a weak buy. However, if a falling lower-period curve overlaps from above another rising longer-period curve, it means that sell signal is weak. 


Moving average is a trend following tool. It is used to determine the start of a new trend and a possible trend reversals. Though this is heavily used in technical analysis, it endeavors to follow the development of a specific trend completely disregarding market actions, unlike what technical analysis aims to do. 

It is best to calculate the average price over a specific period to compute simple moving averages. 

SMA = Sum (Close (i), N) / N,


Close (i) – current close price;

N – period of averaging.

To come up with the exponential moving average, one must consider the prices of the previous period. 

EMA(t) = EMA(t-1) + (K x [Close(t) – EMA(t-1)]),


t – current period;

K = 2 / (N + 1), N – period of averaging.



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