Moat Investor

Moving Averages

A moving average is a very important tool for Moat Investors. It helps you analyze price movements over a specified period while smoothing out dips and spikes. This smoothing makes it easier to analyze trends in stock prices.

A simple moving average is just the average of the price over the last n days, and that period of days moves forward each trading day. Most tools typically use the closing price. That average is then plotted on a graph. For example, a 10-day moving average is simply the average of the previous 10 days’ closing prices.

Popular values to track are 10, 30, 50 and 200 day moving averages. These moving averages tend to provide support or resistance for future movements. That is, as a price moves up toward the 50 day MA, there is a kind of psychological ceiling that investors are hesitant to cross. Once the price breaks out over the 30, 50 and 200 day MA, the MA tends to act as a floor keeping the price above the MA. That is why the MA is an indicator of safety and when it is safe to buy into an uptrend or when you should take a downtrend seriously.

Moat Investor suggests comparing the 10-day MA against a 30- or 50-day MA. When the 10-day crosses the longer MA, it is one piece of evidence for a buy or sell, depending on the direction of the price move. If you are more certain in the trade — which you have to be if you are a true Moat Investor — then you might use the current price against the 10-day moving average or the 30-day moving average.