How Do You Calculate a Moving Average?

To calculate a moving average, an individual first should decide what type of moving average is needed, a simple average or weighted average. After this, the individual can calculate a moving average manually, with the help of a spreadsheet program or via conclusions drawn from expert opinions. The type used depends on the mathematical and technological comfort levels of the individual.

In the stock market, a price can fluctuate over a specific period of time, and a moving average is used to show how and when a stock can fluctuate from this average. The moving average will look at a cost over a specific number of days. For example, if the stock’s 30-day average is needed, the previous 30 days are examined. For this reason, the price of the same stock a week later will be a different figure. Knowing this number helps an investor disregard rare daily price fluctuations and create a regular, expected figure for the stock.

The manual method to determine a simple moving average is less complicated than determining a weighted one. The simple average is what many would consider a regular average for the specified number of days. For example, if examining a period of five days, the sum of the prices for each of the five days would then be divided by 5 to calculate the average. A weighted average gives more weight, or importance, to more current prices. So in this example, older days would be multiplied by 1, and more recent prices would be multiplied by a higher number, then the sum of all adjusted prices would be divided by the total numbers used to multiply the figures.

These processes can be simplified further using available technology, such as a spreadsheet program. To calculate a simple moving average in such a program, the user can enter the dates in one column and the corresponding price in another. The program will have a particular formula that can be entered to calculate various types of averages, such as the weighted moving average. If this formula is not known by the user, the program should have an instruction function built into it or might come with an instruction manual.

An even simpler option is reading a trusted report from a professional investment company or asking a financial advisor. With this option, not only are moving averages available, but analysis often is as well. An expert opinion or other research might include explanations or comparisons that an average investor might find difficult to obtain independently.