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Moving Average aka “MA” is a very popular technical analysis tool. This is very useful for short term traders. Moving average is based on past prices. It helps traders to find the direction or the trend of the stock for the short term.
Two commonly used moving averages are the Simple Moving Average (SMA), and the Exponential Moving Average (EMA).
Simple Moving Average is very simple. It is average closing prices of a stock over time.
Exponential Moving Average (EMA), is also the average of closing prices of a stock over time, but it gives more importance recent closing prices.
Moving averages are used to determine the trend of stocks. It can also help to know the support and resistance level of a stock.
Explaining Moving Averages
Assuming stock XYZ closed at the following prices in last 15 trading days:
Week 1) 102, 104, 110, 105, 107
Week 2) 106, 111, 108, 105, 108
Week 3) 112, 109, 113, 115, 119
How To Calculate the 10 Day Moving Average
Adding the first 10 days moving average:
102 + 104 + 110 + 105 + 107 + 106 + 111 + 108 + 105 + 108 = 1066
Moving Average of Day 1 through Day 10 = 1066/10 = 106.60
You can similarly calculate the Day 2 to Day 11 moving average for 10 days.
However for long term prediction 200-day moving average works better.
See the image below – It is a graph of closing prices of last 200 days of a stock:
For short term:
When consecutive two highs are less than the previous one it is time to sell. When consecutive two lows are higher than previous one it is time to buy.
As I have said earlier, for long term prediction 200-day moving average works better.
For 200-day moving average follow this rule:
Sell the stock if the price of the stock falls below the 200-day moving average.
Buy the stock if the price of the stock rises above the 200-day moving average.
Please note that 200-day moving average will only predict but not confirm the direction of a stock. Therefore it is not a gurantee that if you follow only the 200-day moving average the stock will move the correct direction. There are other indicators as well that that Technical Analysts follow all over the world.
If you are a long term investor there are simpler ways to find stocks to invest for the long term.
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