Finance: What are moving averages?

What are moving averages? Moving averages are calculated using past stock prices in an attempt to determine future trends. It’s calculated by averaging closing prices for a specified period of time.

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Transcript

00:29

crystal ball yeah Warren we know you took it [Warren Buffett eating dinner]

00:31

so averages for normal humans can only be trailing because trailing stockticker

00:37

closing prices give us data we can actually use stock averages don't take

00:42

future data that we're merely guessing at on their charts... only

00:46

real numbers that we can actually point to so here's the 50-day average for [50-day average for coca cola stock]

00:50

coca-cola stock KO in 2012 and if we move forward a year and change well here

00:56

it's a 50-day average right there looks a little bit different and while the 50

01:00

data input elements from its closing price each day vary so the average of

01:06

those data points will move and why do moving averages matter well for

01:11

fundamental analysts kinds of investors you know the people who care just about [Fundamental analyst people appear]

01:14

the cash flow and earnings and margins and revenue growth of companies well

01:17

really don't matter but for chartist types of investors that is those who

01:22

focus really only about trading trends and shapes and curves and the metrics

01:27

behind what patterns of stocks take in the future well, they matter a lot then

01:32

in fact the 200-day moving average is generally a kind of Chartist living [Priests in church]

01:37

Bible for most Wall Street traders and taking meaning from it is all about

01:41

recognizing patterns and then imputing likely future patterns based off of

01:46

those shapes for example if you're looking here at the peak of a Head and [Head and shoulders stock price graph]

01:51

Shoulders chart, the trailing average of this

01:55

say 50-day set here of data points is the line about here but if you move

02:01

forward and look at the back half well then the moving average is about here [Moving average lines moves]

02:06

and if you consider the entire chart well it's about here and the lines are

02:10

there in theory to give color as to what direction the

02:13

market or this given stock is heading and yep sometimes it works and sometimes

02:18

it doesn't [Man eating dinner with Warren Buffett]