Moving Averages – A Powerful Indicator [4 Point Analysis]

1550

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.

How Are Moving Averages Calculated

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 stock’s trend is changing and it may be time to look seriously at buying or selling a given stock.

Using 3 Moving Averages Together

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 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?

TeleChart2007 chart courtesy of Worden Brothers, Inc.

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.

TeleChart2007 chart courtesy of Worden Brothers, Inc.

As you can see, when the MA’s cross this is the pivotal point that signals a change in trend.

Of course, you can backtest the moving averages to see if they work on a previous timeline (by scrolling backward 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.

What Did You Learn About Moving Averages?

Moving Averages are the core and most fundamental element of Technical Stock Chart Analysis.  Using one MA is good using 3 a lot better.

Focus on the moving average lines crossing each other and the price crossing up or down through the moving average lines.

1. Hi Derry, the hardcopy version of the PRO Training will be released in 4 weeks. This will have the published printed book and a DVD with all the training. I will send a message to all the registered members when it is released. Thanks for your interest.

Barry

2. Thanks Barry, another great informative post. I have a question though-
Previously I have used 2 MAs (one fast & one slow) in trading FX & whenever they cross i either short or long.. however here in stocks u are suggesting a combination of 3 MAs, all of them crossing each other in a short period of time, confirms a sell or by signal.. correct?
Thanks again for the post & the tip on using 3 MAs instead of 2 to get a better probability of a trade setup.
AC 🙂

3. Hi Arunav, I guess it is personal choice of how many indicators to use. One think to understand is that Moving Averages are only useful if a stock is trending strongly. If a stock is moving sideways then MAs give false signals, that is why it is best to use them in conjunction with other indicators. See pro training for further details.

4. Agreed Barry, it is the same also in trading FX.. most of the indicators are good as long as the market is trending & not consolidating.. they say ‘trend is your friend, until it bends’.. 🙂
Thanks again for the feedback.
AC