Moving Averages Used by Technical Analysts
One of the first things most technical analysts plot on a stock chart is the moving average. The moving average tells you what a stock’s average price has been over a set period of time. Moving averages can be calculated for any period of time, but technical analysts usually use the following time periods:
- 10-day moving average. The stock’s average price over the past two weeks.
- 50-day moving average. The stock’s average price over the past quarter.
- 200-day moving average. The stock’s average price over the past year.
Technical analysts compare a stock’s current price to its moving average. If the stock price is greater than the moving average, that’s considered to be a bullish signal for the market. If the current stock price is less than the moving average, that’s a bearish signal.
If you’re going to choose a moving average to pay attention to, you should go with the 200-day. Technicians get very cautious when a stock price falls below the 200-day moving average, and may wait on the sidelines before buying back in until the stock rises above the 200-day moving average. When a stock falls below the 200-day moving average, that means that every investor who bought the stock within the past year, on average, is losing money. If the stock creeps upward, many of these disappointed investors are eager to dump the stock, making it difficult for the stock to rise.