It may seem hard to make decisions when trading stocks, but technical indicators like moving averages make it easier. Moving averages help you find trends, cut down on market noise, and trade at the right time. You will learn how to use moving averages in stock trading and how they can help you make smart investment choices in this blog.
What does a Moving Average mean?
A moving average (MA) is a popular technical indicator that finds the average price of a stock over a certain time period and smooths out price data. This gets rid of short-term changes, which helps you find trends. There are two types of Moving averages:
Simple Moving Average (SMA)
It finds the average price over a certain number of days. For instance, a 50-day SMA takes the sum of the last 50 days' closing prices and divides it by 50.Exponential moving average (EMA)
This gives more weight to recent prices than the simple moving average (SMA) and hence more sensitive to changes in prices.
How to Trade with Moving Averages
-
Spotting the trends
Finding market trends is one of the most common ways to use moving averages:
If the the stock price is going up it indicates upward trend.
In case when the stock price is below the moving average it indicates downtrend.
For instance, the price of a stock stays above its 200-day moving average, that means the trend will be bullish over the long term. If, on the other hand, it stays beneath the 200-day MA, the stock is probably going down.
-
Moving Average Crossovers
When a short-term moving average crosses a long-term moving average, a crossover occurs. For entry and exit points, this is a strong light.
When a short-term moving average (like the 50-day MA) crosses above a long-term moving average (like the 200-day MA), it means that the trend is going up. This is called a "golden cross." Right now is a great time to buy.
If a short-term moving average crosses below a long-term moving average, it means that the trend is going down. Traders use this to tell them to sell or not buy.
-
Levels of Support and Resistance
Moving averages are often used to set levels of support or resistance. If the price of a stock gets close to a moving average, it could either bounce off of it (which would be support) or break through it (which would be resistance).
If a stock keeps moving up and finding support at its 50-day moving average, that means there is a strong trend. That level will act as resistance if it can't get above the 200-day MA.
-
Moving averages in combination with other indicators
It's best to use moving averages with other technical indicators like:
The Relative Strength Index (RSI) helps you figure out if a stock is too expensive or too cheap.
Moving Average Convergence Divergence, or MACD, is a way to tell when to buy or sell something by using two moving averages.
Volume Analysis: When price crosses a moving average, the signal gets stronger when volume goes up.
What kind of Moving Averages should you use?
How you trade will determine which moving average to use:
- MVAs of 9, 20, or 50 days are often used by short-term traders.
- 50-day or 100-day MAs are better for swing traders.
- The 200-day moving average is used by long-term investors to look at overall market trends.
Moving averages are quite helpful instrument for stock trading. They reduce the noise in the market, assist in trend identification, and guide your entrance and departure timing into a market. Knowing how to use moving averages properly will help you to improve your whole strategy and make better trading decisions. Start using them immediately in your research to see how your trading changes.
Would you want further knowledge on alternate trading strategies? Keep visiting our blog for wise stock market guidance.