How to Calculate and Read a Simple Moving Average
Learn how to calculate a simple moving average and interpret its slope using hypothetical prices. See how outgoing prices, bar intervals, and adjusted-price settings affect the result.
A simple moving average adds a fixed number of prices with equal weights and divides by that number. It helps summarize recent price movements, but it does not represent investors’ actual average purchase price or a company’s fair value. To interpret the line’s direction, consider both the new price entering the calculation and the old price leaving it.
One price enters as the oldest price drops out
A 20-day moving average calculated from closing prices is the arithmetic mean of the latest 20 trading days’ closes. 20 calendar days differ from 20 trading days, and entering the same number, 20, on a weekly chart produces a 20-week average. Even with the same period, using highs instead of closes produces a different line. Recording the bar interval, price input, and averaging method from the settings makes it easier to reproduce the line on screen. Every day has the same weight in the calculation, so a low-volume day contributes just as much as a high-volume day. This is the key distinction from a volume-weighted average.
The slope can differ from the day’s price change
Today’s average minus yesterday’s average equals the difference between the new price entering today and the price dropping out of the window, divided by the number of periods. The average can therefore rise even when today’s share price falls from yesterday, if a very low past price is removed. Treating this as proof of stronger new buying confuses a calculation effect with market participants’ behavior. It is clearer to record a rising average separately from a daily price gain and check whether recent price highs and lows are actually rising.
Watch how price behaves near the average
Examples of price reversing at a moving average do not mean orders must be clustered at that level. Whether the line acted as support must be judged from the subsequent price response. In a sideways market, price often moves back and forth across the line, so using a single touch as a trading rule can generate frequent trades. Mixing unadjusted prices from before and after a stock split, or comparing data with different adjustment conventions, can also distort the average itself. A longer average is smoother but reacts more slowly to abrupt changes; that trade-off must be accepted.
Worked example
Hypothetical example: If five closing prices are 100, 102, 104, 106, and 108 won, the 5-day average is 104 won. If the next close is 106 won, 100 won drops out and 106 won enters, raising the average to 105.2 won. The daily close fell from 108 won to 106 won, but the average rose by 1.2 won. The difference equals (106−100)÷5. Record this as separate observations: “daily price decline,” “rising average,” and “removal of a low past value.”
What to check
- Check whether the averaging period refers to trading days or a number of bars.
- Use consistent closing-price and price-adjustment settings.
- When the slope changes, check the price that dropped out of the calculation.
- Record the close and the highs and lows after a moving-average touch separately.
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.