Here’s a set of trailing averages.
50 day.
100 day.
200 day.
Note that we say trailing average. Why trailing? Well, we uh...lost our crystal ball. Yeah, Warren. We know you took it.
So...averages for normal humans can only be trailing, because trailing stock ticker closing prices give us data we can actually use. Stock averages don’t use future data that we’re merely guessing at. Only real numbers we can actually point to.
And why do moving averages matter? Well, for fundamental analyst kinds of investors, the people who care just about the cash flow and earnings and margins and revenue growth of companies...they don’t. But for chartist types of investors (that is, those who only care about trading trends and shapes of curves and the metrics behind what patterns stocks take in the future), they matter a lot.
In fact, the 200-day moving average is generally a kind of, uh, living Bible for most Street traders, and taking meaning from it is all about recognizing patterns, and then imputing likely future patterns based off of shapes. The lines are there, in theory, to give color as to what direction the market or a given stock is heading.
Sometimes it works…and sometimes it doesn't.