Definition: Moving average (MA) is the calculated average of a numeric dataset that is adjusted relative to a period of time. Investors use this statistical calculation to analyze stock trends by smoothing the effects of anomalies within data.
What Does Moving Average Mean?
What is the definition of moving average? Simply speaking, a MA is a calculation that determines the average of a block of data, as that block of data changes with time. This analytical tool is typically charted over a period of time to determine trends that are independent of severe variability within the data points. For instance, the daily sales trend of an organization is not as indicative of the current economic environment versus the 10-day MA sales trend. That’s due to the fact that the sales in a given day can fluctuate drastically depending on business activities, whereas the 10-day MA removes the fluctuations and presents a reasonable daily figure charted over time.
How is the moving average calculated? MA is an important tool used by management of organizations to determine the lead and lag effect of business trends. The moving average plotted on charts and compared to economic and industry data, typically helps to forecast future business activities. Typically, the long-term comparability of the MA to another variety of applicable economic data will evolve into the development of lead and lag estimates.
Let’s pretend you own a waterpark, and your ticket sales have a high correlation to the temperature during the summer months of the year. You currently perform a weekly review of your sales, but the erratic nature of weather tends to skew the data. This is a perfect opportunity to leverage the MA calculation to remove the daily anomalies! Let’s take a look at the sales and temperature data, and present the information in the form of a line chart over time. As you will see in the data below, the 5-day MA calculation begins on the 5th day since 5 days are required to develop the average. This average will continue to calculate each day based on the previous 5 days:
Define Moving Averages: MA means a calculated average applied to a block of data that moves with time.