What Is a Moving Average?
1. Why prices look noisy
Daily prices fluctuate because thousands of participants make decisions for different reasons. Looking only at raw prices can make it difficult to identify the broader trend.
2. Why moving averages were created
A moving average smooths short-term fluctuations by averaging recent prices. As each new period arrives, the oldest value drops out and the average 'moves' forward.
3. What a moving average really shows
It summarises where price has been, not where it will go. It is therefore a lagging indicator.
4. Advantages
Reduces visual noise
Helps identify broad trend
Provides a consistent reference point
5. Limitations
Always lags price
Can give false signals in sideways markets
Should never replace price structure
DStreet Principle
Read price first. Use moving averages to support your understanding—not to replace it.
Knowledge Check
Q. Is a moving average predictive?
A. No. It summarises historical prices.