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 three 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?
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 the short-term, use the lower Moving Averages. If you buy and hold a stock for six 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 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 three a lot better.
Focus on the moving average lines crossing each other and the price crossing up or down through the moving average lines.
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