← Reading the Chart · lesson 6 of 10
By the end of this one you'll know what a moving average is, why it's just adding and dividing, and how that smooth line turns a messy chart into a readable one.
A moving average is nothing but adding and dividing, the same math I do on egg counts. My hens don't lay the same number two days in a row: nine one day, fourteen the next, seven after that. So instead of judging the flock by one jumpy day, I add up the last seven days and divide by seven, and that number tells me how the flock is truly doing. A moving average does exactly that with price: add up the last 20 closing prices, divide by 20, and draw a dot, then tomorrow drop the oldest day, add the newest, and draw the next dot. Connect the dots and you get a smooth line gliding along under all those jumpy candles. When the price is living above its average line, the recent stretch has been stronger than what came before, and below it, weaker. No dark magic, just egg math.
Same lesson, told by a hundred dollar bill. Tap to walk it one step at a time.
In this example, a coin closes five days in a row at $96, $104, $98, $106, and $101.
Add those up and you get $505, divide by 5, and the 5 day moving average sits at $101.
So while $100 worth of that coin swung from $96 to $106 and back during the week, the average line barely moved.
The line doesn't change your money one cent, it just draws the calm version of a jumpy week.
You're microwaving lunch in the break room when a coworker shoves his phone at you. His coin dropped 6% this morning and he wants to know if it's over, and under all his jumpy candles there's a smooth line the price is still riding above.
Pick your move. Then peek at the other roads if you're curious.
A moving average is just adding and dividing so you can see the calm version of a jumpy stretch, and one wild day can't shout over a whole month of math.