Moving average

What it means

A moving average is the average price of a security over a set number of periods, recalculated as each new period arrives. By smoothing out day-to-day noise, it reveals the underlying trend: a rising moving average means the trend is up, a falling one means it is down. The 50-day and 200-day moving averages are the most widely watched on daily charts.

Traders use moving averages as dynamic support and resistance. In an uptrend, pullbacks often stop near a rising moving average as buyers step in; in a downtrend, rallies stall beneath a falling one. Crossovers between short and long averages are popular signals: the 50-day crossing above the 200-day is nicknamed a golden cross, while the reverse is called a death cross.

The key limitation is that moving averages lag. They describe where the price has been, not where it is going, so they confirm trends rather than predict turns. Used alone they generate late signals; used with price action and volume they become a useful trend filter.

An example

For illustration, a stock pulls back three times to its rising 200-day moving average and bounces each time. Technicians read that line as support confirming the uptrend, until the day the stock closes decisively below it.

Related terms

Candlestick chart, Support level, Resistance level, Volatility