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In technical analysis, the moving average is an indicator used to represent the average closing price of the market over a specified period of time. They do not predict price direction, but rather define the current direction, though they lag due to being based on past prices. Despite this, moving averages help smooth price action and filter out the noise.

The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). The difference between them is that SMA does not give any weighting to the averages in the data set whereas EMA will give more weighting to current prices.

Simple Moving Average (SMA)

A simple moving average is calculated by adding closing prices for the most recent "n" time periods and then dividing by "n." For example, adding the daily closing prices for most recent 5 or 25 days and then dividing by 5 or 25. The result is the instrument’s average price over the last 5 or 25 days.

The shorter the term of the moving average, the closer it will "hug" prices. This is a plus insofar as it is more sensitive to recent price action. The negative aspect is that it has a greater potential for whipsaws. Longer-term moving averages provide a greater smoothing effect, but are less responsive to recent prices.

The more popular moving averages include the four- , nine- , and 18-day averages for shorter-term traders and the 13-, 26-, and 40-week moving averages for position players.

Here is an example of how moving averages smooth out the price action.

60 SMA is farther away from current price than the 14 SMA

Exponential Moving Average (EMA)

The exponential