Moving averages

Another key technical indicator that is often used is the moving average. A moving average is an average that changes with time. For example, a 10-day moving average is the average of the last 10 days. On the 11th day a moving average will drop the first price used in the calculation of the average and take on the newest price as part of the calculation.

Moving averages are used by technical analysts in numerous ways. They can be used as price points for support and resistance, and can also be used to generate buy or sell signals based on trend analysis. For example, a moving average crossover strategy occurs when a short term moving average crosses above or below a longer term moving average.

chart

In the chart above the green arrows represent times when a 10-day moving average crosses above the 40-day moving average. The red arrows represent times when the 10-day moving average crosses below the 40-day moving average. The 10-day moving average is approximately 2-week of trading while the 40-day represents 2-months. Moving average crossover strategies show when a trend is in place, but many times the entry is late to the party.