Technical analysts construct a moving average of price to provide a better market timing indicator than the traditional straight-line method. The idea is to smooth out daily price fluctuation to get a clear view of the market trend. This technique should not be confused with the oscillators described in NebGuide No. 8 in this series, G91-1058, Using the RSI and Other Oscillators to Analyze the Market. Oscillators are designed to measure the underlying strength of a price move, using a different set of mathematical calculations than those used for moving averages. The moving average is a tool, like bar charts that can help predict when a trend is going up or down.
Many traders use the moving average to determine when to make a trade.
It reduces the effects of cycles, seasonal variations and irregular movements, giving the investor a better idea of the underlying supply and demand strength in the market. It is easier to see these trends using moving averages as each day's individual price is muted. The moving average can be computed using any number of days, weeks or months. Any desired price can be used for the calculation, such as the high, low, close, the average of the high and the low or any other combination. Producers should use the inputs that fit their personal marketing plan.