Monday, October 08, 2012

Moving Average

Moving Average is something very simple in the trading career but such simple knowledge is also some of the most important knowledge. For those beginners who love about investing in stocks and trading stocks. There's no better way than after all your research, try looking at the moving averages to get a better sense of where your entry point is.

Moving Average basically takes the average of the price within the determine duration and plot it into a line.
Example below are diagram taken from Investopedia showing the 15MA and 50MA.
15MA is the total price for the past 15 trading days divide by 15 and for 50MA is of course using 50 days total divide by 50.
As you can see in the diagram above, both 15MA and 50MA after being plotted and draw into lines, both have a different movement.

Two ways to use the Moving Averages:
First is the moving averages crossover;
Secondly will be the Moving Averages as Support / Resistance.

Generally shorter term MA crossing above the longer term MA shows that in the short term, the average number grows thus representing the short term momentum in moving the price up.

Vice versa, if shorter term MA crossing below the longer term MA also shows that the short term momentum grows by pushing the price down.

Sometimes it can be quite difficult to know when the crossing take place during volatility period. But to make things safer, wait for both the line to point upwards before you take an entry.

For Investor, you can use longer term MA such as the 100MA or 200MA.

Moving Average as Support is similar to how  we discuss support and resistance in another post. Other than connecting the line of top and bottom price yourself, you use the MA as the moving line.
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