For example, a 5-day moving average will be a lot more responsive to recent price moves than a 200-day. A moving average smoothes a series by consolidating the monthly data points into longer units of time—namely an average of several months' data. There are three disadvantages that come to mind for me when trading with simple moving averages. However, different asset classes have different time cycles and volatility and even within the same asset classes such as stocks,” said Wong. Moving averages are often calculated on a quarterly or weekly basis. The greatest advantage – it helps us to determine current movement of the trend and to confirm change when it actually happens. After all, the trend is your friend … Disadvantages of moving average: (1) It is necessary to maintain history of different time periods for each forecasted period. There are two main forms of moving average: The simple moving average (as the name suggests) calculates the average price over a specified moving time period. Oftentimes, doing so may make you feel sad and depressed after the move, like a tree that’s been uprooted and moved to … List of Disadvantages of Exponential Smoothing. The problem with being very fast is that you will also be wrong often. Disadvantages of Faster Moving Averages. Weighted moving average method in this method each historical demand in the moving average can have its own weight and the sum of the weight equals one. A moving average takes a data series and "smoothes" the fluctuations in data to show an average. 1. Because the calculation relies on historical data, some of the variable's timeliness is lost. There is a downside to using a moving average to smooth a data series, however. Extrapolation involves the use of trends established by historical data to make predictions about future values. The aim is to take out the extremes of data from period to period. This is not necessarily a bad thing though. The weakest point is that it does not warn about upcoming change of the trend. There’s a reason this method has “smoothing” in its name because it neglects the ups and downs associated with random variation. The faster you decide about entering a potential trade, the less time you have for the decision, and the less information you have available at the moment of making it. So, another clear disadvantage of moving away after you retire is the fact that you’ll be leaving the place where you’ve put down roots. Moving averages are trend following, or lagging, indicators that will always be a step behind. The lag is a side effect of the smoothing process. It produces forecasts that lag behind the actual trend. However, because of this, a 5-day moving average will also have considerably more noise, negating the effect of the moving average in the first place. The advantages of using moving averages need to be weighed against the disadvantages. Disadvantages of Trading with the Simple Moving Average. Likewise all other instruments a moving average has its own advantages and disadvantages. The first two have little to do with trading or technicals. The CONS of using simple moving averages “Market participants assume that the commonly use time parameters of 20, 50, 100 and 200 can be effectively applied to all asset classes. (2) Moving average overlooks complex relationships mentioned in the data. Thus, all moving averages are a trade-off between noise and lag. The main disadvantage is that they are lagging rather than leading indicators but this should not be a problem to longer term investors.