Stocks move every day, so if GE (General Electric) closed at $30 yesterday, then at $30.50 today, the average over the past two days is $30.25.
Now lets stretch this out over say… 200 days, we would get a line showing us the average closing price over that time period.
I did not randomly pick 200 days, the 200dma (day moving average) is actually one of the most commonly used indicators. Even those traders or investors who have no clue about technical indicators would know about the 200dma. It is basically the trend line that if a stock is above it, it is doing good, if it is below it, the stock is doing bad. This is obviously an extremely generalized point of view, but it gives us a general frame of reference.
The 200dma is best used with major indices and blue chips, not small or mid cap stocks.
Let us take a look at the 200dma as applied to GE:NYSE. As long as the stock is above the 200dma, it is considered to be in a healthy uptrend. A strong move below the 200dma would indicate some volatility, and if the stock stays below the 200dma for an extended period of time, it is an indication of continued weakness.
The trend of the 200dma itself is important. If the 200dma is uptrending, that tells us the underlying security is in a strong long term uptrend. If the 200dma is downtrending, then the opposite. A stock will often move above and below the 200dma, but as long as it is in an uptrend, its ok.
