The trend is your friend. When market is in an uptrend, buy stocks. When market is in downtrend sell or short stocks. The position of moving average can help you to determine whether a market is an uptrend or downtrend. When first learning to trade stocks, understanding the moving average is essential in every trader’s basic skill set. It is rather simple yet powerful tool that most stock traders use. You can find this tool with almost any broker who provided stock charts.
Other Technical Indicators
Moving Average Definition
A technical analysis indicator that plots a line of average price over a specified period of time. This is used to spot and identify trends in securities. The moving average essentially smooths out the volatility of the price action by flattening it out. It is one of the most commonly used indicators in technical analysis. This data is then plotted on charts to show the current trend whether it’s up or down. It can be used to track daily, weekly, or monthly trends. After each period, numbers are added to the average and the oldest numbers are dropped. The result is a line that “moves” over time. The shorter the period, the more volatile the line becomes. so a 50 day moving average line moves faster than a 200 day moving average.
How To Interpret The Moving Average
1. A market is in an uptrend if the 50 day moving average (green line) is above the 200 day moving average (red line). Example: Chart of Google below
2. A market is in a down trend if the 50 day moving average is below the 200 day moving average.
Rule: Only buy stocks in a uptrend. Short stocks in a downtrend. DO NOT BREAK THIS BASIC RULE
There are many ways to use a moving average. Some stock traders use the moving average to signal when they should buy a stock. One strategy is called the moving average crossover. For example, when the 10 day moving average crosses the 200 day moving average from below a trader may buy. In the chart above the light blue line crosses from below the red. This can indicate a momentum change and begin a new upward trend.