A moving average is a way of assessing price trends. The problem with looking at say single daily prices for stocks is the underlying trend, up or down, can be masked by short term volatility.

A moving average tries to solve this. For example say a share closes over three days at £2, £2.20 and £2.10. The average is the sum of these divided by three, or £2.10. Now let’s say on day four the closing price is £2.20. The new three day average based on the last three days is ((£2.20+2.10+2.20)/3, or 2.17p. That’s above £2.10 so the “3 day moving average” is rising. When the latest price (£2.20) is above the moving average (£2.17) you have a bullish signal. In practice a 3 day moving average is unrealistic – longer 90 and 200-day averages are much more common.

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