Moving Averages

Moving averages are a technical indicator used in online stock trading. Technical indicators are a useful trading tool that can be applied to you stock trading strategy to give you better alerts as to when to buy and sell stocks. Moving averages are one of the more common indicators. It consists of a calculation that determines the average price of a stock over a certain time frame or number of bars. They can be used on all time frames from 1 minute stock charts on up to daily, weekly, and monthly charts. There are two types of moving averages with similar calculations.

The first is called a simple moving average. This calculation consists of taking the close of each bar going back a specific number of bars, then taking the average of those closing prices. It is then plotted as a line on your stock chart.

The second type is called an exponential moving average. This is the same calculation as the simple moving average except more weight is given to the more recent pricing. This gives you a slightly faster moving average with less lag. Both are effective and there are a few different ways to use them when trading stocks online.

Moving averages provide good support and resistance areas. The larger the moving average the stronger the support or resistance usually is. For example, a 200 simple moving average (or SMA) will be stronger than a 50 or 20 SMA. Because of this, they provide higher probability areas to enter and exit your trades around. You can use them to identify targets when you are already in a trade.

Moving averages can also be used to identify reversals of stock trends. Some online traders look for a crossover between two moving averages. When a smaller (or faster) moving average crosses above a larger (or slower) moving average it is considered a bullish move. When a fast moving average crosses below the slow moving average (from high to low), it is considered a bearish move.

A third way is to use the break of a specific moving average on a certain time frame to give a buy or sell signal on a stock. Some traders wait for a candle or bar to close above a moving average to give a buy signal when it was trending from below. The opposite would be true for a sell signal.

All of these methods are lagging so they tend to get you into a trade late. However it can be added confirmation that a trade you are in is heading in the right direction. By combining these moving averages to other technical indicators within your stock trading system you can increase the profitably and winning percentage of your trades. Study these moving averages on multiple time frames to see what best works with your specific strategy. Every strategy is different and will require the use of different timeframes. Also experiment with simple vs. exponential moving averages to determine which works best for your stock trading style.

TradeStocksAmerica Staff

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