ADVANCED MANAGEMENT ACCOUNTING

Advanced Management Accounting

Advanced Management Accounting

Part 1

In statistics, a moving average, also called rolling average, rolling mean or running average, is a type of finite impulse response filter used to analyze a set of data points by creating a series of averages of different subsets of the full data set.

Given a series of numbers and a fixed subset size, the moving average can be obtained by first taking the average of the first subset. The fixed subset size is then shifted forward, creating a new subset of numbers, which is averaged. This process is repeated over the entire data series. The plot line connecting all the (fixed) averages is the moving average. Thus, a moving average is not a single number, but it is a set of numbers, each of which is the average of the corresponding subset of a larger set of data points. A moving average may also use unequal weights for each data value in the subset to emphasize particular values in the subset.

A moving average is commonly used with time series data to smooth out short-term fluctuations and highlight longer-term trends or cycles. The threshold between short-term and long-term depends on the application, and the parameters of the moving average will be set accordingly. For example, it is often used in technical analysis of financial data, like stock prices, returns or trading volumes. It is also used in economics to examine gross domestic product, employment or other macroeconomic time series. Mathematically, a moving average is a type of convolution and so it is also similar to the low-pass filter used in signal processing. When used with non-time series data, a moving average simply acts as a generic smoothing operation without any specific connection to time, although typically some kind of ordering is implied (Arce, 2005).

Moving averages represent one of the simplest and most powerful technical analysis tools available to the swing trader. When I discuss moving averages in my stock market seminars, almost all traders are aware of moving averages, yet few know their subtleties and sometimes even their basic trading signals.

Moving averages are simple, yet very powerful, trend-following tools. Whereas a trend line is straight, moving averages may be thought of as curved trend lines. Like trend lines, they provide support and resistance. Like trend lines, they communicate very important messages about future price behavior when they are tested and price holds, or when they are tested and prices reverse. Swing traders who wish to be successful should not violate the trend (as indicated by moving averages relevant to the swing trading time frame). You can occasionally bet against the moving averages and win, but typically your victory will be short-lived (Arce, 2005).

The moving average was likely the first technical study used by traders and investors to determine the trend of the market. The moving average smoothes price fluctuations by averaging a selected number of prices. This removes what engineers refer to as “high-frequency noise" from the data, and from the trader's standpoint, the smoothing ...