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Technical Analysis Averages Part 2
Importance of the 20-, 50-, and 200-day Simple Averages
You must pay special attention to support and resistance of the 20-, 50-, and 200-day simple moving average. Additionally, the 20-day simple moving average is a nice tool to help you estimating the inclination of the shorter term trendline.
The 20-, 50-, and 200-day simple moving averages were mostly used in the past before the advent of personal computers. A simple average was used because the calculation was simple; longer periods were used because the movements in those days took time to take off and to complete.
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This tradition is still alive today in the sense that investors still watch these averages. That is the reason why prices generally experience support and resistance at the level of these averages.
Figure 4.36: The 20, 50 and 200 days moving average.
In figure 4.36, note how the 20-day average gives direction to the shorter period price move and often runs parallel with a trendline.
The 50-day moving average gives direction to the medium-time period. If the price is moving above this average, it is good to have this share in your portfolio. If the price, however, moves below the 50-day average, it is better not to have this share in possession.
The 200-day moving average is important for a look at the long-term trend.
Around the 50- and the 200-day averages, you will almost always notice some form of support or resistance.
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