Ask the Institute

Ask the Institute Archive

DATE:  August 13, 2012

QUESTION:

Can you explain the concept of a moving average?

ANSWER:
Sure. A moving average is simply an average that, well, moves! When analyzing stock charts, many investors consider changes in stock relative to some moving average when deciding to make bullish or bearish trades. Let's define a 3-day moving average with an example using Alberto, who owns 100 shares of XYZ stock. Alberto has noticed that over the past three days, the closing prices of XYZ were $51, $52 and $53 respectively. If Alberto adds up 51, 52 and 53, he gets 156. He then divides this number by three, the number of days, and he gets a value of $52. This is the 3-day average of XYZ's closing stock price for the last three days. So, how does this 3-day average become a 3-day moving average? Assume that, on day 4, XYZ stock closes at $54. If Alberto now calculates an average of the last three prices, he must now use $52, $53 and $54, the sum of which is $159. To learn more about the concept of a moving average, view this week's segment of "Ask the Institute."

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