10 Tips to Getting Started With Technical Analysis

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Tip #4: Moving Averages

One of the most popular and easy-to-use tools available to the technical analyst, a moving average is an average price over a specified period of time. You've probably heard of the 5-day, 10-day, 20-day, 50-day, 100-day and 200-day moving averages, but the ones that may come in most handy are Simple Moving Averages (SMA) and Exponential Moving Averages (EMA). Both use closing prices over a designated time frame to come up with the "average" price; the difference is that the EMA gives greater weight to newer data.

In effect, moving averages smooth a series of data and make it easier to spot trends -- something that is especially helpful in volatile markets. So, while individual stocks or indices may experience wild intraday swings, the average price for the day provides enough information to the technical trader to do longer-term analysis on how it will perform in the coming days, weeks or months. And moving averages help traders spot the cornerstones of technical analysis, which are levels that form support and resistance for the security's price.

Next: Tip #5