Don't forget - the whole point of technical analysis is that charts showing past price movements are meant to reveal patterns which indicate future price movement.
Clearly, there are two parts to turning this theory into reality. The first is that you have to create the right charts. The second is interpreting them. Without the second skill, the first is pointless.
At the very simplest level, moving averages can be helpful in showing the general trend of a volatile stock. Many share price graphs are so spiky and volatile, it's hard to see the overall picture. Plotting a moving average chart from the same data smooths it out and makes interpretation easier.
Look at the two charts for Tomkins plc (see below). The first is its share price which is very 'busy'. The second is a 20-day moving average line based on the same data.
You can see that the lower chart is easier to interpret and removes a lot of the 'noise' which is apparent on the share price movement. It's easier to see the overall trend of Tomkins share price during the period in question.
Book offers!
|
|
Trading The US Markets
Paolo Pezzutti |
| Our price: £18.74
Normally: £24.99 |
|
|
New Day Trader Advantage
Jon Markman |
| Our price: £13.59
Normally: £15.99 |
|
|
Project Finance in Theory and Practice
Stefano Gatti |
| Our price: £39.09
Normally: £45.99 |
){kind=link}