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Moving averages quantify the support level where an uptrend pullbacks to before the price bounces to new highs again. Wouldn’t it be great to be able to predict where these “stops” may be? That’s what moving averages often do. The higher lows are shallower pullbacks at which the price “stops” before continuing its uptrend. As this process repeats, the net outcome is a stock that is making higher highs and higher lows. While many seasoned traders can visualize price trends just by looking at their stock charts, it helps to have a definitive indicator that quantifies the trend as well as its components, support and resistance.Īs a stock moves up, you will notice how the pullbacks tend to stop at certain price range before resuming another thrust up. When a stock is not in a trend, it is considered to be choppy in a consolidation. Uptrends indicate buying pressure resulting in rising prices that sequentially make higher highs (price spikes) and higher lows (price pullbacks).ĭowntrends indicate selling pressure resulting in falling prices that make sequentially make lower lows (price drops) and lower highs (price bounces). There are two types of trends: uptrends and a downtrends. When analyzing a stock, the first question should be whether there is a price trend in place. Let’s take a closer look at each of these components.
#Moving averages technical analysis pdf series#
Moving averages take a series of numbers and bring them to life by providing a historical price roadmap comprised of three basic components: trend, support, and resistance.
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Until you actually see them in action, it may be hard to believe but moving averages provide a visual illustration of key price levels. These indicators are considered “moving” averages since prices are continuous throughout the session or series of sessions. For example, a 60-day simple moving average would represent the average closing price of a stock for the past 60-days. They are drawn as lines plotted on a stock chart that represent the average price for a specified period of time. Moving averages are chart-based technical indicators used to determine various qualities of an underlying stock’s price action. One of the most useful and widely used technical indicators are moving averages, which utilize price history, to anticipate future price action. The moving averages and the colors I illustrate on Micron's chart below are the same colors that I display on every stock chart here at Trendy Stock Charts. For example, the 20 Day Moving Average is always the purple line on my stock charts.īeing consistent with chart markings makes it easier for everyone to understand, including myself, especially since I look at numerous charts for several different stocks every day.Technical analysis utilizes charts and indicators to analyze the price action of an underlying stock. Let's review some color coordinating techniques that I use on my charts when I review moving averages. Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react."
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The definition of a simple moving average is "A simple, or arithmetic, moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. There are several different types of moving averages - exponential, simple, smoothing and weighted, just to name a few. I like to keep things as simple as possible, so based on the KISS theory ( Keep It Simple Stupid), I use simple moving averages on my charts. However moving averages are probably the most widely used technical indicator by investors and traders due to their ease of use.
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There are hundreds of different technical indicators out there to analyze stock charts.