What Is The Moving Average And How To Use It To Analyze Stocks
The moving average is a simple trend following tool which you can employ to help you be on the right side of the market. The moving average is the average price of the stock for a period that you chose and it is then updated and plotted continuously on the chart to form a smooth curving line.
There are a few types of moving averages:
There are a few types of moving averages:
- Simple moving averages
- Exponential moving averages
- Weighted moving averages
Determining the health of an index or stock
I have 3 moving averages on my stock charts. They are the 20 MA, the 50 MA and the 200 MA. Basically what they tell me is the health of the index in the short term, mid term and long term.
- If the index is above its 20 MA, then the short term health of the index is healthy
- If the index is above its 50 MA, then the mid term health of the index is healthy
- If the index is above its 200 MA, then the long term health of the index is healthy
You can see from the chart of AAPL above how it move up and down its 3 moving averages. The 3 MAs tell us how healthy AAPL was in the daily charts.
Many traders have trading rules which only allow them to trade stock above their 20 MA, 50 MA and 200 MA. That's because they want to trade stocks that are healthy in the long term, mid term and short term. Who doesn't want to trade stocks like this? Therefore, the MAs can help to act as a filter to find the strongest and healthiest stocks to trade. Its like buying a stock called Usain Bolt in the arena of 100 M stock exchange. The odds of winning are far more higher.
Many traders have trading rules which only allow them to trade stock above their 20 MA, 50 MA and 200 MA. That's because they want to trade stocks that are healthy in the long term, mid term and short term. Who doesn't want to trade stocks like this? Therefore, the MAs can help to act as a filter to find the strongest and healthiest stocks to trade. Its like buying a stock called Usain Bolt in the arena of 100 M stock exchange. The odds of winning are far more higher.
Determining the trend of a stock
If where the stock is in relation to its MAs can help determine the health of the stock, the MAs can also help to determine whether a stock is in an uptrend in the short term, mid term or long term.
- A stock above its rising 20 MA is in a short term uptrend
- A stock above its rising 50 MA is in a mid term uptrend
- A stock above its rising 200 MA is in a long term uptrend
- A stock below its declining 20 MA is in a short term downtrend
- A stock below its declining 50 MA is in a mid term downtrend
- A stock below its declining 200 MA is in a long term downtrend
Now that you know how to determine the trends in a stock, you might want to consider buying only stocks that are above their rising 20 MA, 50 MA and 200 MA. That way, you will be buying a stock that is healthy and in an uptrend in the short term, mid term and long term.
Together with the concept of The 4 Stages Every Stock And Market Goes Through, you can be on the right side of the market more often. That will ensure that your trading will be more profitable.
Since I'm a 60 min trader, for me, I only trade stocks that are above their 60 min 20 MAs and 50 MAs. If you work using the daily charts and follow the trend, you might want to only buy stocks that are above their daily 20 MA, 50 MA and 200 MA.
Together with the concept of The 4 Stages Every Stock And Market Goes Through, you can be on the right side of the market more often. That will ensure that your trading will be more profitable.
Since I'm a 60 min trader, for me, I only trade stocks that are above their 60 min 20 MAs and 50 MAs. If you work using the daily charts and follow the trend, you might want to only buy stocks that are above their daily 20 MA, 50 MA and 200 MA.
