DEFINITION of Moving Average Chart
A moving average chart is a tool used by technical analysts to track the price movements of a security or commodity. It plots average daily settlement prices over a defined period of time, anywhere from a few days to a couple years.
BREAKING DOWN Moving Average Chart
Usually, when a stock price moves below its 50-100 day moving average, things are not in your favor. The opposite is true for stocks that protrude their moving average.
Moving averages have the advantage of smoothing out price data by creating a constantly updated (moving) average price. This average can be adjusted to a trader's or market strategist's preferred time horizon. This can be anything from 10 days, 20 minutes, 30 weeks or whatever time frame that's appropriate.
The simplest benefit of smoothed data is its ability to filter out "noise." That annoying erratic behavior of security price movements. So in short, a moving average offers a useful indication of the market's trend, which can be trending up, down, or sideways. Many traders feel the market presents profitable investment opportunities during certain conditions buoying market momentum.
Another popular use of the moving average is recognizing the concept of support and resistance. According to technical analysis theory, support and resistance conceptually determine the movement of the price of a security. Prices will tend to stop and reverse at certain predetermined price levels. A support level's price tends to find support as it falls. Meaning, a price level is more likely to "bounce" off this level rather than break through it. However, once the price crossed this level, by an amount adjusted for noise, it is likely to continue falling until meeting another support level. A resistance level is the opposite of a support level. It's where the price tends to find resistance as it climbs higher. Again, this indicates that the price is more likely to "bounce" off this level rather than break through it. Except, once the price has breached this level, adjusting for noise, it is likely to continue rising until meeting another resistance level presents itself.