Moving Averages
Moving averages are one of the easiest and most popular analysis tools that are available to investors today. A moving average takes the data for the closing price of a stock and builds a foundation for several other analysis tools.
Simple moving averages compute the average price over a period of time you determine and calculate the mean price for that stock allowing you to determine when the stock prices move below or above the average price of the stock over a specific period of time. You can use this for any period of time that you determine is best suited to your investment needs.
Exponential moving averages apply weight to the most recent prices in comparison to older prices. This type of an average reacts to price changes much more quickly than a simple moving average and therefore calculations are much more difficult to understand and maintain.
Depending on your trading preferences, you may choose to use either method of calculating a moving average. A short moving average tends to be more sensitive and therefore may give you signals based on fewer data points and therefore may increase the number of incorrect (or false) readings than you would get on a longer moving average which tends to move somewhat slower.
Moving averages work best when a stock is following a specific trend and not necessarily when it moves into a trading range. For instance, if the moving average tends to be going up, then the trend should also be up, while if the moving average is moving down then the stock trend should also be down. You would not want to react to each change however, you'd want to follow the trend and see which direction the stock continues to trend in.
Moving averages are helpful for following trends, identifying support and resistance levels and setting up a trading program. Moving averages help a trader verify if they are in line with the current market trend of a security although you will seldom have the opportunity to get in at the bottom or get out at the top of a range for the security. Moving averages should always be used with other tools that compliment them, not relied on as the only method of tracking your securities.
Moving averages are one of the easiest and most popular analysis tools that are available to investors today. A moving average takes the data for the closing price of a stock and builds a foundation for several other analysis tools.
Simple moving averages compute the average price over a period of time you determine and calculate the mean price for that stock allowing you to determine when the stock prices move below or above the average price of the stock over a specific period of time. You can use this for any period of time that you determine is best suited to your investment needs.
Exponential moving averages apply weight to the most recent prices in comparison to older prices. This type of an average reacts to price changes much more quickly than a simple moving average and therefore calculations are much more difficult to understand and maintain.
Depending on your trading preferences, you may choose to use either method of calculating a moving average. A short moving average tends to be more sensitive and therefore may give you signals based on fewer data points and therefore may increase the number of incorrect (or false) readings than you would get on a longer moving average which tends to move somewhat slower.
Moving averages work best when a stock is following a specific trend and not necessarily when it moves into a trading range. For instance, if the moving average tends to be going up, then the trend should also be up, while if the moving average is moving down then the stock trend should also be down. You would not want to react to each change however, you'd want to follow the trend and see which direction the stock continues to trend in.
Moving averages are helpful for following trends, identifying support and resistance levels and setting up a trading program. Moving averages help a trader verify if they are in line with the current market trend of a security although you will seldom have the opportunity to get in at the bottom or get out at the top of a range for the security. Moving averages should always be used with other tools that compliment them, not relied on as the only method of tracking your securities.
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