A moving average plots a line on the price area of a stock chart and gives you the average price over a specified period of time. You choose the number of periods to use and a moving average formula consists of adding all the closing prices for that number of periods and creates a running average. So if you are using a 10 simple moving average on a 3 minute chart the price you are seeing on the moving average line is the average price over the past 30 minutes. If you switch that chart to a daily chart time frame, you are now looking at the average price over the last 10 days.

TWO TYPES OF MOVING AVERAGES

There are primarily two main types of moving averages, simple and exponential. Simple calculates the average price over a specified number of periods. An exponential moving average is similar but its formula gives more weight to the more recent prices. This results in a moving average that has less lag or delay. One really isn’t better than the other. It all depends on how you use them in your trading strategies and what requirements your particular strategy has.

SUPPORT AND RESISTANCE

Moving averages give you areas of support and resistance. They can be used on all areas and generally the larger or “slower” the moving average, the stronger the support and resistance will be around it. For instance a 200 period moving average will have a stronger support/resistance level than a 20 or 50 period moving average.

FINAL SUMMARY

Moving averages are great tools to add to almost any trading strategy. The can provide good entry points and exit points depending on the strategy. But when using them as a signal (as in with a crossover strategy) they are lagging, just like all the other indicators are. Because of this, it’s best to combine more that one indicator when looking for entry and exit points. They are a valuable tool in technical analysis and I’d strongly recommend studying them and using a couple on your charts.

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