Moving averages are a series of snap shots of stocks' closing prices over a 50- or 200-day period when the market actually ran (or walked... or crawled).
The charts you see on traders' websites that show a bunch of lines going up and down? Those are the moving averages. Look closely and you'll see a line following the closing prices of a stock and another line either above or below that line. If a stock's price is headed up, there might be what traders call a support line under it. This one shows how low the price will drop before bouncing back up. If a stock is heading to tank-ville, there will be a line drawn above the averages. That one shows how far the stock will jump before it's pulled back down.
The idea is that you can use this info to get an idea of how the stock's doing and how it might do in the future.
Of course, trying to predict how stocks will do over the long term is a lousy idea. Even financial types in big jets who are paid to predict how stocks will do are right only about as often as the Psychic Friends Network. Stocks don't always follow averages: when they don't they surge past the resistance or support lines, it's called a break out.
Related or Semi-related Video
Finance: What are At-the-Close Order and...24 Views
Finance a la shmoop.. What are at the close order and at the opening orders
Well simply put they're a way of buying and selling stocks and bonds and [Shmoop video on PC monitor]
they're really a hybrid form of a limit order only instead of limiting the order
of a hundred shares of Mickey D's at 45 bucks or better the "limit"
is time-based that is it is placed a minute or less from the close of the
market like 3:59 p.m. New York time or the open of the market like 9:31 a.m. New
York time got it so why would someone do this kind of limit order well if a [Man discussing limit order]
company that day before had printed what looked like a really good quarter but
upon deep inspection the investor who owned the shares thought otherwise and [Man inspecting company folder]
you know wanted to dump them well then that investor would want to take
advantage of a high opening print and just sell it whatever the price was a
minute or two after the open making the bet that the stock would then trade down
after bigger smarter better analysis was published on the stock itself and then
everyone else went to dump it - so what about an at the close order well kind
of inverse of the same thing here a company's quarter will be announced at [4:28pm shown on digital clock]
4:30 p.m. New York time tons of excitement leading up to it so
"everyone" wants to be long the stock ahead of earnings but you think
earnings will disappoint like you know buy the rumor sell the actual news kind
of vibe so you want to hold the stock until the last minute that day and then
you just give the guidance to sell the stock that last minute of trading or at [Investor sells stock to market]
the close and you're out and now we have arrived at the close of this video... Adios! [Man waving on stage]
Up Next
What are moving averages? Moving averages are calculated using past stock prices in an attempt to determine future trends. It’s calculated by ave...
What is Regression Analysis? Regression is a form of statistical analysis that goes back to trading history and isolating a particular variable to...
What is a Chartist? A chartist is a trader and/or analyst who relies on technical analysis and charts in order to make decisions for trading the ma...