Moving averages are the best-known, most popular technical indicator. They represent price data in a “smoothed” fashion, showing a simple line graph overlaid on the price chart based upon recent price data. The amount of recent data used is controlled by you: a 10-day moving average, based on very little data, would tend to be volatile and would cling closely to actual price data, whereas a longer-term study, such as the commonly-used 200-day moving average, would move more slowly and smoothly and lag price data far more.
You can add as many moving averages with as many different parameters and colors as you like. You can also choose whether or not any given moving average is simple or exponential.
Most of these terms are self-explanatory with the exception of “Simple” versus “Exponential”. Briefly stated, Exponential moving averages place a greater weight on recent price data, whereas Simple moving averages treat all the price points with identical weighting. Therefore, exponential averages tend to react more swiftly to recent price activity.
You can type in the number of days you want for the calculation directly, or you can move the slider bar left and right to dynamically observe the effect on the moving average indicator on top of the chart itself. As you choose different averages you want to add, click the Add button, and they will be appended to the study set:
Below is an example of a chart with three moving averages. Although not shown here, a legend is provided in SlopeCharts showing the meaning of each colored line (as to whether it is simple or exponential and how many days are used) as well as the value of each of these lines are whatever place you are pointing on the chart.
You can use any positive integer as the basis for days. Below, for instance, are some very-long term moving averages, based on 200, 500, and 700 price bars each. The legend for these, as well as the values, is shown at the top of the chart. This is a very long-term chart of SPY, and the smooth progression of the three moving averages, coupled with the steady amount of space between them, shows what a consistent bull market there was for most of the 1990s.
People using moving averages in different ways. One common use is to look for them as an important level of support. Here, for example, is the S&P 500 index with a 200-day moving average. Each time the market entered a period of weakness, it tended to find strong support at this average.
More commonly, traders look for instances of “crossover”, which can suggest a change in trend or, in the example below, an affirmation of strength. The chart below is of Tesla Motors (TSLA), and although the stock had been directionless for years, once the moving averages did a clean crossover, with the faster averages clearly crossly above, and staying above, the slower ones, the stock began its amazing ascent.
To see what Slopers in the comments section have been saying about this indicator, check out the archives located here.