What is the Moving Average?

Moving Average Formula

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Where,

  • C1, C2…. Cn stands for the closing numbers, prices, or balances.N is the number of periods for which the average requires to be calculated.

Explanation

Moving average is a type of arithmetic average. The only difference here is that it uses only closing numbers, whether stock prices or balances of accounts etc. So, the first step is to gather the data of the closing numbers and then divide that number by the period in question, which could be from day 1 to day 30, etc. After that, another calculation is an exponential moving average. However, we have only discussed a simple equation here.

Examples

Example #1

Stock X traded at 150, 155, 142, 133, and 162 for the previous five trading days. Therefore, you must calculate the moving average based on the given numbers.

Solution

Use the following data for calculation:

One can calculate MA using the above formula:

  • (150+155+142+133+162)/5

The moving average for the trending five days will be:

  • = 148.40

The MA for the five days for the stock X is 148.40

Now, to calculate the MA for the 6th day, we need to exclude 150 and include 159.

Therefore, Moving Average = ( 155 + 142 + 133 + 162 + 159 ) / 5 = 150.20 and we can continue doing this.

Example #2

Alpha Inc. was incorporated as a bank last year. Now it is almost year-end to report the financial statement of the firmFinancial Statement Of The FirmFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more. The norms of the Central Bank asked the banks to report the average balances of the account instead of closing balances at the end of the year. One should do the average balances monthly. The financial analyst of the firm took sample account #187, where below were the closing balances reported.

It would be best if you calculated a simple moving averageSimple Moving AverageSimple moving average refers to a type of moving average, and it is derived by calculating the average of prices or values observed over a specific number of days or periods.read more based on the above closing balances.

First, in this, we will calculate the sum of the closing balances to calculate the average.

The cumulative total for day 10 will be:

  • Cumulative Total for Day 10 = 124102856.26

The cumulative total for day 11 will be:

  • Cumulative Total for Day 11 = 124739450.26

Similarly, we can calculate the cumulative total for the remaining days.

Therefore, the simple MA for 1st 10 days will be as follows,

=124102856.26/10

The MA for 1st 10 days will be –

  • The MA for 1st 10 days = 12410285.63

Therefore, the simple MA for the 11th day will be as follows:

  • MA for 11th Day = 12473945.03

Similarly, we can calculate the moving average for the remaining days’.

Example #3

Mr. Vivek wants to compute the estimated price of the onion for tomorrow based on an average of the last ten days. He believes there is a 10% upwards trend because of rising fuel prices. Also, he believes that the prices of onions fluctuate based on moving averages. The last ten days’ prices of the onion per kg are 15, 17, 22, 25, 21, 23, 25, 22, 20, and 22. Based on the criteria, you must compute the projected onion price on day 11.

Use the following data for the calculation of moving an average in Excel.

Therefore, 7 days of MA in Excel will be as follows:

  • 7 Days MA = 21.14

Therefore, the next 7 days of MA will be as follows:

  • = 22.14

Similarly, we can calculate 7 days MA as shown below.

Estimated Price on Day 15

The 7-day MA for the onion price is 20.14.

There will be a fuel price increase, which could inflate onion prices.

Therefore, the projected onion price on day 15 will be 20.14 * 1.10 = 22.16, which can be rounded off to 22.

Uses of Moving Average

This article has been a guide to Moving Average and its definition. Here we discuss the calculation of the moving average using its formula, practical examples, and a downloadable Excel template. You can learn more about financial analysis from the following articles: –

  • Capital Market LineWeighted Average in ExcelWeighted Average In ExcelIn Excel, we calculate Weighted Average by assigning weights to each data set. It is generally used to compute robust observations in statistics or portfolios and is calculated as (w1x1+w2x2+….+wnxn)/(w1+w2+..wn), where w is the weight allocated to the x value and the sumproduct function is used.read moreAverage Rate of Return FormulaAverage Rate Of Return FormulaAverage Rate of Return (ARR) is the expected rate of return on an investment or asset divided by the initial investment cost or average investment during the project’s life. The formula for calculating the average rate of return is: Average annual net earnings after taxes/Initial investment * 100%read moreAverage vs Weighted AverageAverage Vs Weighted AverageIn Excel, the words average and weighted average are different. Average is a method for calculating the central point of a given data set, and it is done using the traditional method of adding the numbers and dividing the sum by the number of data sets present. A weighted average, on the other hand, is an average calculated in the same way but with a weight multiplied with each data set.read moreQuantitative Research ExamplesQuantitative Research ExamplesQuantitative research examples include using the mean for an opinion poll, calculating portfolio return, risk assessment, and calculating average annual return.read more