The power of Moving Averages as a stock market technical analysis indicator should never be under-estimated. See how Moving averages can be used in a practical way
The Power of Moving Averages In Stock Market Analysis
Indicators may seem like something only Einstein himself can master, but here everything is within reach, in just a few minutes you will have a solid understanding of a very important concept. Indicators are lines that get plotted on a Stock chart to make it simpler for you to understand the history, and perhaps the future of a stock.
Moving Averages are your friends.
Moving averages are the staple diet of any chart reader, and enable you to visualize changes in trend in price.
Moving Averages or “MA” are a simple mathematical calculation that takes the average price (mean) for a given period and plots this on a chart.
So the average price for the first 5 days = 3.8.
The key here is when we use 2 or 3 moving averages together we see visually when the lines cross a stocks trend is changing and it may be time to look seriously at buying or selling a given stock.
Below you can see a standard chart with 3 moving averages plotted.
MA50 (RED) – this is the moving average of the last 50 periods (in this case days – it is a daily chart)
MA20 (Yellow) – this is the Moving Average of the last 20 days
MA10 (Orange) – this is the Moving Average of the last 10 days
The secret is in the combination of the indicators.
What do you see here? Take a long look!
- Where do the lines cross?
- What happens to the Stock price after the lines cross?
- What happens to the overall trend when the lines cross?
How to use Moving Averages to signal BUY and SELL opportunities!
Here we are using 3 Moving averages you could use 2, however 2 is the minimum. You can set different moving average timeframes, common ones are :
10:20:50:200 day MA’s
If you are trading more on a short term use the lower Moving Averages. If you buy and hold a stock for 6 months or more, use longer averages.
As you can see, when the MA’s cross this is the pivotal point that signals a change in trend.
Of course, you can back test the moving averages to see if they work on a previous timeline (by scrolling backwards in the chart). Use them as a minimum indicator to help you envisage when a stock is going to move in your favor, or move against you.
Moving averages are an excellent indicator as they are based on price, and price as we know is the most important of all indicators.
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