Moving averages

A simple moving average is the mean closing price over a fixed number of recent sessions, recalculated each day. Its purpose is to strip out daily noise so the direction underneath becomes visible, and it does that well.

The cost is unavoidable and worth stating plainly: an average of the last two hundred days is, by construction, describing the past two hundred days. It turns after the price has turned. Everything people like about moving averages and every complaint about them are the same property, which is that they lag deliberately.

The charts here offer the 50-day and 200-day simple moving averages. The 50 is roughly a quarter of trading and responds within weeks; the 200 is about ten months and moves slowly enough to read as a trend rather than a signal.

Neither number is special. They are conventions that became self-reinforcing because enough people watch them, which is a real effect but a different one from the averages having predictive content of their own. A price crossing an average describes where it now sits relative to its own recent history; it is not an instruction.

The crossings between them have names, a 50 rising through a 200 being called a golden cross and the reverse a death cross, and the names carry far more confidence than the evidence does. Both lag by definition, both produce frequent false signals in sideways markets, and neither has a record that justifies the vocabulary.

The volume-weighted average price is the average price actually paid, weighted by how much traded at each level, rather than the average of closing prices. Sessions with heavy volume count for more.

That makes it a rough answer to what participants actually paid, which is why execution desks use it as a benchmark for whether a large order was filled well. It is a measure of transacted price rather than a trend line, and reading it as a slow moving average misunderstands what it is for.

MACD subtracts a slower exponential moving average from a faster one, twelve and twenty-six periods on the charts here, then plots a nine-period average of that difference as a signal line. An exponential average weights recent prices more heavily, so it responds faster than a simple average of the same length.

Because it is a difference between two averages, MACD measures whether momentum is building or fading rather than where the price is. It inherits every limitation of its inputs: it lags, it whipsaws in range-bound conditions, and it knows nothing about the company. Its more defensible use is divergence, where price makes a new extreme the indicator does not confirm, rather than the crossings, which are numerous and mostly noise.