How to Choose the Proper “Length” of a Moving Average
How to Choose the Proper “Length” of a Moving Average
The “length” or the number of reporting periods including the moving average calculation affects how the moving average is displayed on a price chart.
The shorter its “length”, the fewer the data points that are included in the moving average calculation, which means the closer the moving average stays to the current price.
This reduces its usefulness and may offer less insight into the overall trend than the current price itself.
The longer its length, the more data points that are included in the moving average calculation, which means the less any single price can affect the overall average.
If there are too many data points, price fluctuations may become “too smooth” that you won’t be able to detect any kind of trend!
Either situation can make it difficult to recognize if price direction may change in the near future.
For this reason, it’s important to select the length (or periods) that provides the level of price detail appropriate for your trading timeframe.
In this section, we first need to explain to you the two major types of moving averages:
- Simple
- Exponential
We’ll also teach you how to calculate them and give the pros and cons of each.
Before we move on, just remember that moving averages smooth price data to form a trend-following technical indicator.
They do not predict price direction; instead, they define the current direction with a lag.
