What is Moving Average?
Moving Average is a statistical method that calculates the average of a data set over a specified period. It's called 'moving' because as new data becomes available, the average 'moves' by dropping the oldest data point and including the new one.
Moving Average is used to smooth out short-term fluctuations in data sets and highlight longer-term trends, which is invaluable in making informed business decisions.
This technique is widely used to analyze time series data, such as sales figures, stock prices, or website traffic.
Example:
Imagine an e-commerce company tracking its daily sales. Day-to-day sales might fluctuate due to various factors like promotions, weekends, or holidays.
A Moving Average can help smooth these fluctuations, providing a clearer view of the overall sales trend. For instance, a 7-day Moving Average will average the sales of each week, smoothing out the daily variations.
Calculating Moving Average:
Calculating a Moving Average is straightforward, especially with tools like Excel or Google Sheets. Here's a simple step-by-step method to calculate a 7-day Moving Average in Excel/Google Sheets:
- - Arrange your time series data in a column.
- - In the next column, enter a formula to calculate the average of the first 7 data points.
- - Copy this formula down the column to apply it to the rest of the data points, shifting the 7-day window down each time.
- - For Excel, the formula would look something like =AVERAGE(B2:B8) for the first cell, and then it would shift down for subsequent cells.
- - For Google Sheets, the process is similar, using the same AVERAGE function.
Moving Average is a powerful tool in data analytics for making sense of volatile data sets. We will cover the steps above in more detail in the next concept.