Imagine you are cruising in the deep blue sea on your luxurious 100ft long yacht.

Do you like that picture?

Me too!

Now, a terrible storm breaks out, the electric system collapses, huge waves take over, and the engine is gone.

Not to mention the navigation system is also down.

You feel helpless and lost in the middle of nowhere.

What do you do?

You sail back using the compass.

This is all you have.

A compass.

Similarly, I hear many traders in their early steps of their trading career to feel somewhat the same.

Lost.

Your compass as a beginner is a tool called the Moving Average.

Attach it on the chart and navigate with more confidence.

The moving average is a line, a curving line.

When the current price is above the moving average then you may assume that the market is moving upward.

When the price is below the moving average then we can say the market is moving downwards.

How does this sound?

The Moving Average consists of many points or dots if you prefer.

Each dot is a number that corresponds to an average, an average of prices.

Are you with me so far?

One more time, each dot is an average.

Do you remember how to calculate an average?

I am sure you do.

Take the following 5 numbers: 10, 20, 30, 40, and 50.

Add them up.

Did you get 150?

Correct.

Now, to calculate the average, we divide by 5 since we have 5 numbers.

30

Great.

Now, a 3-period moving average will consist of many dots, each corresponding to the average of the corresponding prices.

Let me draw the picture for you.

Say, we have 6 prices for the sake of our discussion.

10, 20, 30, 40, 50, and 60.

10 is the oldest price, and 60 is the most current price.

Now group these prices in groups of 3, starting with the 3 oldest prices.

So, 10, 20, and 30 is the first group.

If you add them up to get a total of 60 and then divide by 3, the first dot is 20.

Then, we leave out price 10 and add 20, 30, and 40.

The total, then, is 90. Again, divide by 3 to get 30. This is the second dot.

Now, to calculate the next average or dot, we leave out price 20 and add 30, 40, and 50 to get a total of 120.

After dividing by 3, we get 40.

We do the same for the last 3 prices.

40, 50, and 60.

The total is 150.

Then we divide by 3 to get 50.

Now, connect the dots.

This is the Moving Average line.

Not that hard after all!