How To Read Stock Charts: Moving Averages

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Moving averages are a crucial component of how to read stock charts. We'll show you how looking at these trend lines can cut through the noise of daily chart action and give you a clearer picture of what's happening.

One handy way to figure out if a stock is on a roll is to look at its moving averages, which track the average closing share price over a certain period of time. Why look at these trend lines? Well, for one thing, they cut through the noise of daily chart action and can give you a clearer picture of what’s happening. The 50-day moving average is the red line on this chart. If it’s climbing upward, that means the stock is trending higher – always a good a sign. 200-day moving average: the average share price over the last 200 days of trading. It’s also a fine way to figure out where the big money is moving. Institutional investors often use the 50-day line as a reference point, buying more shares when a stock pulls back to the moving average. And when shares rebound higher off the key level as a result, we call that “finding support.” Why is that important? Because those brief pullbacks can lead to additional buying opportunities for individual investors like you. On the flip side, when a stock crumbles below a moving average in heavy volume, we call that “breaking support.” And when a stock has trouble getting back above that line, we call that “hitting resistance.” And that might mean that the big investors aren’t as interested in the stock as they used to be. As always, make sure you’re keeping an eye on volume, because that’s how you know just how aggressively fund managers and other major players are moving into or out of a stock.