I keep hearing about the 50-day, 100-day and 200-day moving averages. What do they mean, how do they differ from each other, and what causes them to act as support or resistance?

By Casey Murphy AAA
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. Why do investors with minority interest receive a minority interest discount and ...

    Discover why investors with minority interest usually receive a discount to the fair value of their ownership share, and ...
  2. What does the efficient market hypothesis assume about fair value?

    Found out what the efficient market hypothesis says about the fair value of securities, and learn why technical and fundamental ...
  3. How do I implement a forex strategy when spotting a Triple Bottom Pattern?

    Learn about the triple bottom pattern and how it is used to create effective trade strategy in the forex market, including ...
  4. How do I calculate free, discounted and operational cash flow in Excel?

    Take a quick look at how you can calculate a company's operating cash flow, free cash flow and discounted cash flows using ...
RELATED TERMS
  1. Indicator

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

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

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

    A process that establishes an estimate of the value of a failed ...
  5. Derived Investment Value (DIV)

    A valuation methodology used to calculate the present value of ...
  6. Forex Spread Betting

    A category of spread betting that involves taking a bet on the ...

You May Also Like

Related Articles
  1. Charts & Patterns

    Why These Are 2015's Most-Promising ...

  2. Chart Advisor

    Trade Healthcare Providers with this ...

  3. Fundamental Analysis

    Interested In Pharmaceutical Stocks? ...

  4. Fundamental Analysis

    Is Apple's Stock Over Valued Or Undervalued?

  5. Trading Strategies

    Trading On The Psychology Of Round Numbers

Trading Center