The Purpose of Moving Averages

Moving averages are used to smooth out the “noise” of shorter-term price fluctuations so as to more readily be able to identify and define significant underlying trends.

For example, Chart 3.1 shows the Nasdaq 100 Index along with three simple moving averages, a ten-day moving average that reflects short-term trends in the market, a 50-day (if plotted weekly, a 10-week) moving average that reflects intermediate market trends, and a 200-day (or 40-week) average that reflects major trends in the stock market. (Moving averages can employ monthly entries for very major term trends or, conversely, can be plotted even at one-minute intervals for very short-term, intra-day, day-trading purposes.)

Chart 3.1. The Nasdaq ...

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