Moving Averages

I am trying to utilise the tools on this site to re-evaluate my portfolio.

I know it may be my ignorance but what is a moving average and what story does it tell?

If the ASX 300 index goes up and down +10, +10, -10,-10,+10,+10 etc(repetitiously +10 -10 on any given day) what is the 20 day moving average? would it be 0? or would it be 10 or 20?

Thanks

Hiflo

Hi Hiflo ... Moving averages are simply the average value of the fund over the past X days. It is a lagging indicator and essentially just smooths out the results to show the trend without all the "noise" contained in daily movements in value.

The longer the average period, the less accurate and more trend-indication it shows. I like using 20 day and 50 day moving averages to show short-term trends, and 100 day and 200 day moving averages to show long term trends.

For your example of a fund (or index) oscillating evenly between two values over an extended period ... the average value over time stays constant at the average between those two values. Eg. if the index goes between 1990 and 2010, then the average is 2000 (the midpoint between those two values).

I hope this helps.

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Sim'


This is a general comment only and does not constitute advice. Before making financial decisions you should seek advice from a professional adviser, who can take into account your specific circumstances and investment goals.