What are moving averages?
Moving averages (also known as MA’s) are indicators used for technical analysis by all different kinds of traders and investors. The moving average provides a smooth consistent line based on the price action of a particular stock or security. This helps mitigate short-term spikes or declines in a stock price to give an overall picture of a stock’s average price. MA’s take the price of the security over a specified period of time and plot it on a line as an average smooth line.’
How can moving averages help your trading/investment plan?
MA’s are used to identify a suitable average price for a specific security. Many traders and investors like to see if a moving average will have a bounce or reject effect when the price of a security approaches the moving average. Traders will look for a “rejection” (touches the moving average and moves back down) to play a short bearish position. Traders will look for a “bounce” (touches the moving average and moves back up) to play a long bullish position.
Risks of moving averages
As all other indicators and pieces of information come with an asterisk, moving averages are no different. A combination of using them along with other pieces of conviction can yield good results but not MA’s individually. This is because due to news and other events or just an overall strong trend day, MA’s are broken through and the price action does not bounce or reject them. Additionally, there are different periods you can use for a moving average, some may be more effective than others and this will have to be determined by each trader’s discretions.
Most commonly used moving averages
Generally, the most commonly used MA’s are the 9-day, 21-day, 50-day, 100-day, and 200-day.
Moving averages can be a great indicator and tool to add to your trading plan. They help organize price data and can give extra conviction in your trades. Try them out for yourself and see if they can help you! Stay safe and keep learning.
Your Fellow Stock Hackers
Erwin and Cherry
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