Average prices provide a tool for identifying buy and sell signals.
A moving average is the arithmetic average of prices over a period of time. For example, a three-day moving average of Milk prices would be the average of the closing prices of the past three days. To find the average, you add the closing prices from the last three days and divide by three. The next day, you calculate a new average and so on. The moving averages can then be plotted on a graph.

Analysts can use three-day, five-day, ten-day or twenty-day moving averages - whatever suits them – to watch price moves. The analyst interested in short-term moves would use shorter-term moving averages.

The moving average chart below records both three-day and ten-day moving averages of wheat prices. Some of the typical rules the analyst will follow are:

Sell when the short-term (three-day) moving average moves below the long-term moving average.





The moving average can also be considered one of a number of technical indicators (basically, a number calculated from a formula rather than a chart figure) whose quantitative value tells the analyst something about the character of the market. Some indicators, like relative strength or MACD (Moving Average Convergence/Divergence) can signal when a market is overbought or oversold, and are useful when markets are in a horizontal, or non-trending, trading range. You should be aware that there are a wide variety of quantitative indicators used by technical analysts, but discussing specific indicators is beyond the scope of this chapter.





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