Note the year to date chart of Ford below with a 50 day simple moving average. Traders can quickly garner insight into the company’s trend with the average and not be distracted by short term fluctuations.
50 is arguably the most often used number of periods for a moving average calculation. However, by shortening the number of periods (20 is popular) the moving average will greater reflect short term fluctuations. By lengthening the number of periods (200 is popular), traders can remove a significant amount of noise from the market.
The periods in the calculation do not have to be days, but can be weeks, hours, minutes, etc. By choosing a shorter period, traders can more easily identify a security’s short term trend. For example, a one minute period may be used for insight on a stock’s single day trend.
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