A:

Whether you are using the 50-day, 100-day or 200-day moving average, the method of calculation and the manner in which the moving average is interpreted remain the same. A moving average is simply an arithmetic mean of a certain number of data points. The only difference between a 50-day moving average and a 200-day moving average is the number of time periods used in the calculation. The 50-day moving average is calculated by summing up the past 50 data points and then dividing the result by 50, while the 200-day moving average is calculated by summing the past 200 days and dividing the result by 200. (To learn more, see our Moving Averages tutorial.)

As the question implies, many technical traders use these averages as an aid in choosing where to enter or exit a certain position, which then causes these levels to act as strong support or resistance. Simple moving averages (SMA) are often viewed as a low-risk area to place transactions, since they correspond to the average price that all traders have paid over a given time frame. For example, a 50-day moving average is equal to the average price that all investors have paid to obtain the asset over the past 10 trading weeks (that is, over the past two and a half months), making it a commonly used support level. Similarly, the 200-day moving average represents the average price over the past 40 weeks, which is used to suggest a relatively cheap price compared to the price range over most of the past year. Once the price falls below this average, it may act as resistance because individuals who have already taken a position may consider closing the position to ensure that they do not suffer a large loss.

Critics of technical analysis say that moving averages act as support and resistance because so many traders use these indicators to inform their trading decisions. For more on this debate, see Can technical analysis be called a self-fulfilling prophecy?

RELATED FAQS

  1. What Book Value Of Equity Per Share (BVPS) ratio indicates a buy signal?

    Find out more about book value of equity per share, what BVPS measures and how to determine what level of BVPS indicates ...
  2. Does stockholders equity accurately reflect a company's worth?

    Learn whether stockholders' equity accurately reflects a company's worth. Stockholders' equity is found by taking the difference ...
  3. How can I spot trading opportunities looking at year-to-date (YTD) performance?

    Discover how to spot trading opportunities by looking at year-to-date performance. YTD performance is an effective tool to ...
  4. What are common growth rates that should be analyzed when considering the future ...

    Learn about some of the most commonly used measures for evaluating a company's future growth prospects and analyzing it as ...
RELATED TERMS
  1. Precedent Transaction Analysis

    A valuation method in which the prices paid for similar companies ...
  2. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  3. Indicator

    Indicators are statistics used to measure current conditions ...
  4. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  5. Appraised Equity Capital

    The excess of the market value of an asset over its book value. ...
  6. Asset Valuation Review (AVR)

    A process that establishes an estimate of the value of a failed ...

You May Also Like

Related Articles
  1. Chart Advisor

    Stocks Breaking to Downside - Time to ...

  2. Chart Advisor

    3 Ways To Trade The Bounce In Coal

  3. Chart Advisor

    How Investors are Profiting from Cyber ...

  4. Fundamental Analysis

    Are Fast-Casual Restaurants Overvalued?

  5. Chart Advisor

    Buy These Stocks on The Pullback

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!