Moving averages can be used to make decisions about what is best for you and your company. They are useful for investors, financial institutions, and even individuals as they can offer guidance on which investments can gain the most value over time. However, not all people can afford professional services to track the market or to interpret the results of past market activity. This is where a simple moving average can help out.
A moving average smooths a series of monthly data by combining the current data points in a single unit of time-namely a single average of several weeks’ worth of data. The smooth provides more accurate results because it eliminates short-term noise in data and focuses on the long-term trends of economic activity. A smoother series is more preferable to a non-smooth one because it can capture changes more accurately in the direction of the underlying economy. By focusing on economic data that are representative of the same time frame, the smoother is able to provide a clearer picture of economic data than the more generalized data sets. This enables the investor to make a more informed decision about what to buy or sell.
An average is a great way to determine whether an asset is undervalued. For instance, if a particular business has a history of achieving above average sales and profits and a stable future, its future earnings potential is likely to remain higher than other businesses with similar characteristics. However, it is important for the investor to also analyze how its current financial status affects future earnings potential and how changes in its current financial conditions will affect its long-term financial performance. A smoother average helps to create a more accurate picture of future earnings potential by eliminating all extraneous variables that can distract an investor from the main points.
