chapter 7 : Trend Analysis

3 Moving Average

Moving average is a method used in trend analysis to smooth out short-term fluctuations in data and reveal the underlying long-term trend.

It works by calculating the average of a fixed number of consecutive data points and then moving that calculation forward through the dataset.

A moving average is the average of values over a specific time period that continuously updates as new data comes in, helping to show the overall direction of the trend.


Why it is used in Trend Analysis

  • Reduces short-term noise or fluctuations.

  • Highlights long-term patterns or direction.

  • Makes trends easier to understand and visualize.


Simple Example

Suppose monthly sales are:

MonthSales
Jan100
Feb120
Mar140
Apr160
May180

3-Month Moving Average

  • Jan–Mar → (100 + 120 + 140) ÷ 3 = 120

  • Feb–Apr → (120 + 140 + 160) ÷ 3 = 140

  • Mar–May → (140 + 160 + 180) ÷ 3 = 160

Moving average series: 120, 140, 160
This shows a clear upward trend.


Types of Moving Averages

1. Simple Moving Average (SMA)

  • Each value has equal weight.

  • Most basic and commonly used.

2. Weighted Moving Average (WMA)

  • Recent values get more weight.

3. Exponential Moving Average (EMA)

  • Gives exponentially higher weight to recent data.

  • Reacts faster to trend changes.


Advantages

  • Easy to calculate and understand.

  • Smooths irregular data.

  • Useful for identifying trends.

Limitations

  • Based on past data, so it lags behind actual changes.

  • Choice of period can affect results.