Moving average

The simple form adds the closing prices of the last stated number of bars and divides by that number, so each new bar adds one price at the front and drops one off the back. The exponential form weights recent prices more heavily and never fully drops an old one, using a smoothing factor derived from the chosen period. Weighted, smoothed and volume weighted variants apply different weighting schemes to the same idea. All of them take a price series and return a slower version of it.

Two parameters determine everything the line does, and both are choices rather than settings with correct values. The period sets how much is smoothed and therefore how far the line lags: a long period gives a steadier line that turns later, a short one a responsive line that turns on noise. The price input is usually the close, but median, typical and weighted prices are equally available and produce a visibly different line on the same chart. Because an exponential average and a simple average of the same period turn on different bars, two readers with the same period can be looking at different lines.

The recurring misunderstanding is directional. A moving average is an average of prices that have already printed, so a rising line states that the recent window averaged higher than the previous one, which is a statement about the past. Crossings between two averages, of which the golden cross is the most quoted, are geometric events with the same limitation, and in a market moving sideways two averages cross back and forth repeatedly, a behaviour called whipsaw. Averages are also frequently described as support or resistance; that is a convention among chart readers, tested with mixed results, rather than a property of the line.