In this edition of Technical Tuesdays, Derek Kravitz, FSA’s Investment Analyst, explains moving averages.
Moving Averages Transcript
Hi, everyone. My name is Derek. I’m an investment analyst here at FSA, and welcome to Technical Tuesdays. Today, we’re going to be going over what a moving average is. If I have a series of data points such as this, let’s pretend that these are the closing prices of a particular stock. So on day one, it was at $1. On day two, it was at $2 and day three $3, pretty awesome growth. So if I wanted to sort of plot in a more smooth manner how the stock is doing, we could use what’s called a moving average. Basically, what a moving average does is it looks at a given number of data points, the last let’s say four, and it takes an average of that and tells you what the average is at any point in time. And it’s called a moving average because when a new data point comes in, let’s say the stock goes to 9 the next day, this moving average, which is currently a four-period moving average because it’s looking at the last four, it adds the new data point and drops off the old one. So the moving average, as long as the price of the stock or the market in our case continues to go up, the moving average will go up as well.
So let’s look at this visual. If I’ve got my axes here, price there, time here, and we have a stock that’s increasing in price, each X marks one day and one closing value, if the stock continues to go up, the moving average will look something like this. So why are moving averages important? Well, the entire market pays attention to them, and so do we. As you can see in this chart, the lowest point was the 200-period moving average. So if the entire market pays attention to this, we want to pay attention to it as well because we want to know potential levels of support and resistance and where other traders are looking at a potential turn in the tides. So the 200-period moving average just takes our example from earlier, but instead of eight values, it’s looking at the closing prices of the S&P 500 over the last 200 trading days, not calendar days but actual trading days, and it takes that smooth effect and kind of shows us, well, the market generally seems to be going in an uptrend but when you get volatility in the market, it can come down to those levels, and it gets really interesting to see whether or not the market can hold these particular levels.
In our next video we’re going to be discussing how FSA actually uses these moving averages to make investment decisions.
This has been Technical Tuesday. My name is Derek. Thank you for joining us.