Loading the player...
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 to aid in choosing where to enter or exit a 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 (or 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.

[Note: Moving averages are a great way to identify areas of support and resistance, but they work best when combined with other forms of technical analysis. Investopedia's Technical Analysis course will provide you with an in-depth overview of technical analysis with over five hours of video along with real-life case studies to help you apply the concepts in the wild.]

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 is the Moving Average (MA) important for traders and analysts?

    See why the statistical concept of moving averages plays a central role for traders and chartists who rely on technical analysis ... Read Answer >>
  2. What are the main disadvantages of using Moving Averages (MA)?

    Learn about some of the inherent limitations and possible misapplications of moving average analysis within technical stock ... Read Answer >>
  3. How do I start using technical analysis?

    Technical analysis is a method of analyzing securities by evaluating current and historical price and/or volume activity. ... Read Answer >>
  4. What is the difference between fundamental and technical analysis?

    Fundamental analysis and technical analysis, the major schools of thought when it comes to approaching the markets, are at ... Read Answer >>
  5. How is a simple moving average calculated?

    Learn about the simple moving average, how the indicators are used, and how to calculate a stock's simple moving average ... Read Answer >>
  6. How is the Exponential Moving Average (EMA) formula calculated?

    Learn the formula for calculating both simple moving averages and exponential moving averages, indicators that are frequently ... Read Answer >>
Related Articles
  1. Trading

    Simple Moving Averages Make Trends Stand Out

    The moving average is easy to calculate and, once plotted on a chart, is a powerful visual trend-spotting tool.
  2. Trading

    How to Use a Moving Average to Buy Stocks

    The moving average (MA) is a simple technical analysis tool that smooths out price data by creating a constantly updated average price.
  3. Trading

    What's a Death Cross?

    A death cross is seen when the short-term moving average of a security or index falls below its long-term moving average.
  4. Trading

    The S&P 500 Is 300 Days Above Its 200-Day Moving Average

    The S&P 500 has closed above its 200-day moving average for over 300 trading days, making it the 15th longest streak in the history of the popular index.
  5. Trading

    These 3 European Nations Could Lead the Way Lower

    The charts of ETFs tracking equities from three European nations suggest that developed markets could be readying for a move lower.
RELATED TERMS
  1. Moving Average - MA

    A moving average (MA) is a technical analysis indicator that ...
  2. Technical Indicator

    Technical indicators are mathematical calculations based on the ...
  3. Moving Average Chart

    A moving average chart is used to plot average daily settlement ...
  4. Technical Analysis of Stocks and Trends

    Technical analysis of stocks and trends is the study of historical ...
  5. Linearly Weighted Moving Average

    A type of moving average that assigns a higher weighting to recent ...
  6. Technical Analysis

    A method of evaluating securities by analyzing statistics generated ...
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  3. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  4. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center