Moving Averages

A moving average is one of the most flexible and widely used technical indicators. Chart

analysis is largely subjective and difficult to test. By contrast, moving averages are easily quantified and can be fed into a computer program to generate specific buy and sell signals. By definition, a moving average is an average of a specific data. For example: if a 10 day moving average is desired, the closing prices for the last 10 is added and the total divided by 10.

Using the moving average

The moving average helps to determine the trend of prices. Using shorter averages such as the 10 day / 20 day averages or longer moving averages such as the 50 day moving average / 100 day moving average / 200 day moving average depends on the time horizon of the investor or trader. The longer moving averages also help determine the support areas under the market or resistance levels above the market (if the market is trading below the averages).

A moving average can also help determine the timing of entry or exit. For example: A short term trader could buy into the index every time the market close above the 10 day average and sell out of the position when the market closes below the 10 day average.