Simple Moving Average Method

Moving Average methods are one of the simplest and a well known evaluation methods are accessible to financiers of the present day. A Moving Average method makes use of the data for the finishing cost of a stock and constructs groundwork for quite a few extra analysis tools. Simple Moving Average method is used to calculate the standard price over a time period; you find out and compute the mean price for that stock permitting you to decide when the stock values shift below or above the average cost of the stock over a particular period of time. You can make use of this method for any period of time that you decide is best appropriate for your investment requirements.

Moving Average method works well when a stock is pursuing a particular style and not essentially when it shifts to a trading range. For example, if the moving average has a tendency to be shifting up, then the style is also supposed to be up, whilst if the moving average is shifting downward then the stock trend must also be downward. You should not act in response to each transformation. On the other hand, you would want to go after the trend and see which route the stock persists to trend in.

Advantages:

• It is simpler when compared to trend method by the principle of least squares.
• It is elastic. If a couple of values are added in the data towards the end, due to availability of latest data, the moving averages would change only towards the end of the data and can be easily calculated.
• It provides a true indicator of inherent trend in the data.
• If the data is available on monthly or quarterly basis, moving totals on yearly basis remove the seasonality from the data.

Disadvantages:

• Trend values cannot be found in the beginning and towards the end of the data.
• Moving average values are not amenable to mathematical treatment for forecasting trend values obtained by method of least squares.

Questions:

• State some of the advantages of this method.
• State some of the disadvantages of this method.