What is Moving Average?
A moving average is defined as "a succession of averages derived from successive segments (typically of constant size and overlapping) of a series of values".
In general they are used to identify the trend direction.
In statistics, a moving average (rolling average or running average) is a calculation to analyze data points by creating a series of averages of different subsets of the full data set. It is also called a moving mean
or rolling mean
. The main types (variations) of moving average are:
- Simple Moving Average
- Cumulative Moving Average
- Weighted Moving Average
Given a series of numbers and a fixed subset size, the first element of the moving average is obtained by taking the average of the initial fixed subset of the number series. Then the subset is modified by "shifting forward"; that is, excluding the first number of the series and including the next value in the subset.
A moving average is commonly used with time series data to smooth out short-term fluctuations and highlight longer-term trends or cycles. The threshold between short-term and long-term depends on the application, and the parameters of the moving average will be set accordingly.
For example, it is often used in technical analysis of financial data, like stock prices, returns or trading volumes. It is also used in economics to examine gross domestic product, employment or other macroeconomic time series. Viewed simplistically it can be regarded as smoothing the data.