Invest in the Moving Average Formula: Complete Guide 2025

The moving average formula stands as one of the fundamental tools in technical analysis, used by an increasing number of investors and traders to decipher stock market trends. Through this detailed article, you will find a comprehensive explanation of this method, its practical applications, various investment strategies, as well as a reliable and adjusted example based on the latest figures of 4imprint Group plc (FOUR.L).

Introduction to the Moving Average Formula

The moving average is a mathematical indicator that allows smoothing the price series of an asset over a given period to extract the underlying trend. Thanks to this process, professionals manage to eliminate the "noise" of the market and better anticipate directional movements, whether upward or downward.

The growing interest in the moving average formula can be explained by its ability to adapt to various types of markets: indices, stocks, currencies, commodities, cryptocurrencies.

Definition and Basic Principle

The moving average consists of calculating the average of prices over a sliding window (number of days, hours, or minutes depending on the asset being followed). For example, a twenty-day moving average takes into account the last twenty values, eliminating sporadic fluctuations to better reveal the general direction.

Thanks to its recurrent calculation and graphical representation in the form of a curve, the moving average simplifies the reading of trends, allowing for greater objectivity compared to a simple observation of the price chart.

Types of Moving Averages

Three main families of moving averages are distinguished in the world of trading and investment:

  • Simples Moving Average (SMA): This is the arithmetic mean of prices over a given period. Easy to interpret, it offers a solid foundation for tracking trends.
  • Exponential Moving Average (EMA): This indicator emphasizes recent values by giving them a higher weight. EMA reacts more quickly to a change in trend, which appeals to many short-term traders.
  • Weighted Moving Average: Less commonly used by individuals, this version assigns a progressively increasing weighting to the most recent prices, but in a linear manner (different from EMA).

The choice of type depends on the trading style, investment horizon, and volatility of the tracked security.

Why Use the Moving Average Formula?

The popularity of the moving average formula lies in its simplicity, universality, and ability to provide visual support for decision-making. This indicator provides:

  • A reduction in volatility, excluding major events.
  • The highlighting of primary trends across different time scales.
  • The possibility of generating clear buy and sell signals during key crossings or breaches.

It also serves as the foundation for many derived indicators (MACD, Bollinger band, etc.), thereby reinforcing its legitimacy in the toolbox of modern investors.

Tech Analysis with the Moving Average Formula

The integration of the moving average into an exhaustive technical analysis allows for anticipating market reversals, identifying phases of acceleration or deceleration of prices, and supporting entry and exit strategies.

Identifying Trends

The primary objective of the moving average is to indicate whether a market is evolving in a bullish, bearish, or sideways trend. This serves to:

  • Confirm the general direction of prices.
  • Define entry points "with the wind," meaning buying within an uptrend or selling during a downtrend.
  • Limited countertrend interventions, which are generally more risky.

Concrete example: if the price of a stock remains above its 50-day moving average, it indicates a positive momentum. Conversely, if the price breaks below this average, caution is advised as the risk of reversal increases.

Crossings

Crossings are one of the most popular applications of moving averages, generating potentially powerful buy or sell signals:

  • Bullish crossover: The short-term moving average crosses upwards over the long-term moving average. Example: the 20-day moving average cuts through the 50-day moving average from below, signaling renewed strength and possibly the start of a new uptrend.
  • Bearish crossover: The short-term moving average crosses downwards over the long-term moving average. Example: the 20-day moving average breaks through the 50-day moving average from above, often indicating the beginning of increased selling pressure.

The reliability of these signals increases when they occur near support or resistance zones.

Parameterization: Which Period to Choose?

The choice of the moving average period depends on the investor's style:

  • Very short term: 5 to 12 days or sessions.
  • Short to medium term: 20 to 50 days.
  • Long term: 100 to 200 days for major trends on indices or solid stocks.

A parameterization that is too short can lead to numerous false signals, while a period that is too long risks being overly reactive, especially on volatile stocks.

Practical Application: Real Case with 4imprint Group plc (FOUR.L)

To illustrate the practical implementation of the moving average formula, let's take the example of 4imprint Group plc (ticker FOUR.L), listed on the London Stock Exchange and specializing in commercial services, including promotional printing and the provision of promotional items.

Key Figures of 4imprint Group plc in November 2025

  • Current Price: 3,120 GBX (approximately 37 € according to the current exchange rate).
  • Industry Sector: Commercial Services.
  • Industry: Commercial Printing/Forms.
  • Market Capitalization: 862,14 million GBP.
  • P/E Ratio (TTM): 10.
  • Basic EPS (TTM): 5 GBP.
  • Annual Revenue: 1,07 billion GBP.
  • Net Income: 91,72 million GBP.
  • Beta (1 year): 1,66 (volatility higher than the market).
  • Dividend Yield: 5,99 %.
  • Last Dividend: 123,70 pence (paid on May 1, 2025).
  • Change over 1 Year : -39,63 %.
  • Historical High: 6,780 GBX (April 12, 2024).

Graphical Interpretation with Moving Averages

By using a 20-day moving average and a 50-day moving average for the stock FOUR.L, investors can:

  • Visually identify rebound or correction phases.
  • Detect dangerous or opportunistic crossovers of the stock.
  • Identify oversold or overbought zones during periods of high volatility (with a relatively high beta of 1.66).

For example, a break below the 50-day moving average after falling below the 20-day moving average may suggest a prolonged consolidation or a new bearish cycle, as observed during the year 2025 when the stock fell by more than 39% in one year. Conversely, a recovery above both moving averages may signal the start of a technical rebound, to be monitored alongside news flow about the company (investments, quarterly results, forecasts).

Fundamental Analysis and Financial Indicators Supporting Technical Analysis

The benefit of combining the moving average with fundamental analysis is to optimize investment decisions:

  • A P/E ratio of 10 indicates a profitable company that may be undervalued after the observed correction in the stock price.
  • The dividend yield close to 6% attracts investors seeking recurring income.
  • The revenue growth, which should reach at least 1.32 billion USD in 2025 according to forecasts, tends to reassure on the potential for recovery.
  • The historical volatility (beta above 1.5) encourages proper entry point setting, use of stop-loss orders, and regular monitoring of moving averages to limit the risk of sudden reversals.

Sectoral Comparison and Investment Timing

The commercial services sector is characterized by strong seasonality and dependence on customer advertising budgets. The use of moving averages allows:

  • To avoid buying at seasonal peaks.
  • To make arbitrages during calm periods.
  • To anticipate volatility returns in case of annual forecast upgrades or major investments (example: expansion of the distribution center in 2024 for 20 million USD).

Investment Strategies with the Moving Average Formula

The moving average can be deployed in many investment strategies, from swing trading to long-term trend following.

Trend Following Strategy (Trend Following)

In the trend following strategy, the investor enters a position when the price crosses above its long-term moving average (for example: 150 or 200 days). This approach aims to maximize gains on long directional cycles and limit losses during major reversals.

For the stock 4imprint, investing at the breakout above the 50-day moving average after a correction could prove relevant if fundamentals follow (increasing revenue, growing dividends).

Moving averages for swing trading

In swing trading, the operator generally relies on the crossover of short-term moving averages (5 to 20 days) to enter quickly during rapid impulses and exit at the first signs of exhaustion. This style suits volatile stocks, but it requires rigor and regular monitoring.

Risk management and stop-loss orders

The integration of moving averages in risk management helps better place stop-loss orders:

  • A stop below the 21-day moving average allows limiting losses in case of sudden correction.
  • The parallel tracking of several moving averages over different time horizons offers a more dynamic view and helps avoid false signals, frequent on thinly traded or news-sensitive stocks.

Optimization of the application on different assets

The moving average formula is not reserved for stocks. It also applies successfully to:

  • Stock indices, to detect regime changes (example: CAC 40, S&P 500).
  • Currencies and forex pairs, for trend or technical correction tracking (EUR/USD, USD/JPY).
  • Commodities and energies (gold, oil, natural gas).
  • Cryptocurrencies (Bitcoin, Ethereum...), where volatility makes the use of moving averages particularly relevant to filter oscillations.

For each type of asset, it is important to adapt the period of the moving average according to the frequency of oscillations and the duration of recurring trends.

Combining the moving average with other indicators

The effectiveness of the moving average increases when it is associated with other technical analysis tools:

  • MACD (Moving Average Convergence Divergence) to measure the strength and amplitude of the trend.
  • Bollinger Bands to assess levels of volatility and overbought/oversold conditions.
  • RSI (Relative Strength Index) to verify the nature of the movement (momentum).

This combination allows cross-referencing signals and avoiding ineffective interventions.

Limits and pitfalls of the moving average formula

No matter how effective it may be, the moving average has some limits and pitfalls:

  • Inherent lag: signals always arrive after the start of a movement. Without confirmation, one can miss most of a cycle.
  • Many false signals on highly volatile markets or in ranges.
  • Dependence on the parameterization of the chosen period: too short = noise, too long = delayed signals.
  • Gaps or violent breaks can distort the curve.
  • The absence of consideration for fundamentals behind price variations makes some signals less relevant during major announcements or exceptional results.

It is therefore recommended never to rely solely on the moving average and to analyze the fundamental context (news, news flow, financial statements, forecasts).

Practical Tips for Investing with the Moving Average

  • Do backtests: check the effectiveness of the chosen period over several years to refine your settings.
  • Model crossings and monitor associated volumes to validate the relevance of signals.
  • Compile signals from different time units to strengthen your perspectives (daily vs weekly).
  • Consider integrating the moving average into an algorithmic or semi-automated investment strategy if you want to accelerate the responsiveness of your investment system.
  • Take into account the size of spreads and level of exposure, especially on illiquid stocks or assets.

Conclusion: the moving average, pillar of modern technical analysis

The moving average formula remains an indispensable tool for any investor or trader who wants to structure their decision-making, optimize their entries and exits, and better manage the inherent risks of market volatility. Its adaptability to different horizons, sectors, and asset profiles makes it a universal reference, provided one remains vigilant about parameterization, combination with other indicators, and regular integration of fundamental data.

By putting the moving average into practice on dynamic assets like 4imprint Group plc in 2025, any investor can hope to improve their overall performance while limiting excessive risk-taking. Used well, it becomes the foundation of a winning stock market strategy, both for short and long term.