The Most Important Parameter for Moving Averages
What a moving average period means
The length of a moving average period, or simply moving average period, means how many bars are used for calculating the moving average. When you are selecting a moving average period length, you are deciding how far back to the history you want to look.
For example, a simple moving average with a period of 10 will be calculated by adding up the closing prices of the last 10 bars and dividing the sum by 10. The result, the value of the moving average, represents the average closing price of the last 10 bars. If your time frame is 5 minutes, this moving average represents the average price in the last 50 minutes. If you use daily charts, it represents the average closing price in the last 10 days (2 weeks).
Period length is the most important parameter
There are three basic parameters you can set with moving averages. Besides the period length the other two are:
- the price used for calculation (e.g. close, or average of high and low)
- the type of the moving average (e.g. simple or exponential)
Of these three parameters, the length of the moving average period will in most cases be the most important. If you are new to moving averages, try to put two simple moving averages on your chart (not important which security it is). Set the period of one moving average to 10 and the period of the other moving average to 200. The difference is huge.
Moving averages lag behind price
A short period moving average (e.g. 10) will track the price closely almost all the time. On the contrary, a long period moving average (e.g. 200) will often divert far from the price and stay away for extended periods of time. You will notice that the long moving average lags behind the price – it always goes in the same direction as the price, but takes a bit more time to get moving. In fact, all moving averages lag behind price. The longer the period length, the greater the lag.
Which moving average period to choose?
So is it better to use short moving averages, because they are faster? Or are there any benefits of using long period moving averages? Read Moving Averages: Choosing the Right Period Length.
