How to Use Moving Averages for Stock Trading
How to Use Moving Averages for Stock Trading
A clear view of a stock’s trend can help investors decide when to buy, sell, or hold a position. However, identifying trends can be tough. Some technicians use an indicator known as a simple moving average to confirm established trends. Watch this video to learn more about this tool—what it does, how it’s calculated, and the pros and cons of applying it to different time frames.
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0 ->
5.593 -> Technical analysts
often say, "The trend
8.083 -> is your friend,"
because they think
9.703 -> a security that's going up, is
more likely to keep going up.
13.633 -> And a security
that's going down,
15.343 -> is more likely to
keep going down.
18.173 -> Having a clear view
of the trend can
20.263 -> help an investor decide
whether to buy, sell, or hold
23.443 -> a position.
24.953 -> However, sometimes determining
the trend can be difficult
28.093 -> and that's why this
video is so important.
31.093 -> A simple moving average is a
technical indicator, or tool,
35.023 -> that tracks a security's
price over a time period
38.083 -> and plots it on a line.
39.923 -> This essentially "smooths
out" price fluctuations
43.003 -> to give an investor
a general idea where
45.553 -> the trend is heading.
47.443 -> Using simple moving averages
to determine trends,
50.533 -> an investor can better
identify buy and sell signals.
54.223 -> To create a simple
moving average chart,
56.443 -> start by choosing a time frame.
58.813 -> A frame can be any
period of time--
61.163 -> including a day, a
week, or even a month.
64.933 -> For this example, we'll
define a period as a day.
68.563 -> Let's create a moving
average using a 20-day chart.
72.733 -> We'll take each day's price,
then add them together.
75.863 -> Then we'll divide that number
by our time frame number,
78.623 -> which in this case, is 20.
80.683 -> This gives us today's
20-day average price,
83.773 -> which is a short-term
moving time frame and one
86.683 -> that active traders may use.
89.113 -> To create a moving average,
each day we'll drop the last day
92.563 -> in the time frame
and add today's.
95.383 -> A 20-day moving average
can help determine
97.693 -> short-term up trends, down
trends, and sideways trends.
102.193 -> Examining a security's
moving average in relation
104.803 -> to its current price,
can help investors
107.203 -> identify potential buy signals.
109.823 -> For example, when a price
breaks above an upwardly sloping
113.023 -> moving average, this could
mean it's a good time
115.543 -> to buy a stock.
117.343 -> Another buy signal could
be a support bounce.
120.283 -> This is when a security's
moving average acts as a support
123.433 -> level for the price.
125.333 -> When the price comes down
to the moving average,
127.413 -> and then rallies up
again, this bounce
129.882 -> could be used as a buy signal.
132.373 -> On the flip side,
moving averages
134.113 -> can also help investors know
when to sell a position.
137.083 -> For example, if
the stock's price
138.793 -> rises to the moving
average and bounces,
141.613 -> this might be a sell signal.
144.013 -> Looking at a simple moving
average over a short-term time
146.813 -> frame can be very helpful,
but it has its drawbacks.
150.653 -> One thing to be
aware of is whipsaws.
153.523 -> A whipsaw is when the stock
crosses over the moving
156.463 -> average, giving one signal,
and then reverses quickly,
159.763 -> giving the opposite signal.
161.743 -> A short-term time
frame, like 20 days,
164.203 -> usually shows more
whipsaws, which
166.513 -> is why some investors
may prefer to use
168.433 -> intermediate and
long-term time frames.
171.463 -> For example, intermediate term
charts with a 50-day moving
174.673 -> average, show a smoother
average and have fewer buy
177.793 -> and sell signals.
179.113 -> As a result, the investor
may stay in the trade longer.
182.503 -> Long-term trends, like those
found with a 200-day moving
185.563 -> average, are even smoother.
187.633 -> When looking at all
these averages together,
189.523 -> we can see that the
short-term average
191.263 -> is confirmed by the intermediate
and long-term averages.
195.373 -> The main disadvantage of
any simple moving average
198.103 -> is that they're slow to
reflect price changes.
200.923 -> Because each period
is given equal weigh,
203.593 -> day 50 counts as
much as day one.
207.073 -> As you can see, a
large gain or drop
209.593 -> hardly factors into a moving
average for some time.
212.933 -> This is known as lag.
214.873 -> Let's look at an example
to illustrate this.
217.603 -> If you use a simple moving
average for buy and sell
220.123 -> signals, your stock could
experience a huge pullback,
223.573 -> well before the simple average
reflects this activity.
227.173 -> To avoid lag, consider
using another analysis,
230.143 -> such as a weighted moving
average or exponential moving
233.473 -> average.
234.733 -> These types of moving
averages consider recent data
237.733 -> the most relevant and
give it more weight.
241.183 -> Consequently, these types
of moving average lines
243.853 -> react quickly to the
securities price changes.
247.153 -> This is helpful for
active traders who want
249.163 -> to place short-term trades.
251.353 -> It's also important to note
that moving averages don't
253.903 -> predict future
performance, they only
256.212 -> confirm established trends.
258.733 -> Even with these
drawbacks, moving averages
260.863 -> are a powerful tool
of technical analysis
263.613 -> that can help you determine
trends and identify
265.953 -> buy and sell signals.
268.203 ->
Source: https://www.youtube.com/watch?v=r3Ulu0jZCJI