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Technical Analysis - Moving Averages
The basis of many technical indicators is the moving average. In its simplest form, moving averages are the calculation of the average closing price of a stock over a period of time. If, for example, the simple moving average is being calculated for a 10-day period, the average of the closing prices over the last 10 days is calculated. The 'moving' aspect of this calculation comes from the idea that the set of days used changes each day. The last day is taken out of the computation and the newest day's value is added in.
Most commonly, moving averages are used to follow stocks that are trending and can be useful in identifying possible momentum trades. However, because past data holds substantial weight in the computation, the simple moving average often lags behind the true data, appearing either higher or lower that the true price. In response to this, an exponential moving average can be used to reduce the delay. In this method, the more recent data is weighted exponentially more than past data. Although the formula is somewhat more difficult to calculate, many trading websites and software programs can quickly solve the formula for you. While an exponential moving average reduces lag, it can sometimes be too sensitive and respond somewhat erratically to price changes. Because of this, it is important to understand the ramifications of each situation you are studying to identify the most appropriate indicator to use in each situation.
Moving averages are used extensively in trend trading because they provide traders with a tool to easily chart a stock's trend. When a stock is experiencing an uptrend, its price will often be above the moving average. When the stock finally crosses its moving average, this usually signals a change in direction or a slowdown of the trend. The reverse is true for a downtrend.
Used alone, moving averages can provide traders with valuable information about a stock's performance. However, this simple calculation is the basis of many technical analysis strategies. For this reason, BetterTrades emphasizes learning how to use moving averages in many of its Atlanta technical analysis classes. Bollinger Bands, another popular topic used in BetterTrades curriculum, utilize moving averages to locate its three bands on the price chart. Moving Average Convergence Divergence (MACD) is another commonly used indicator that is built from moving averages. The 26-day exponential moving average is subtracted from the 12-day moving average to give the MACD line. Then the 9-day EMA, known as the signal line, is then plotted over this information. Also used to follow trends, the MACD line signals a trend change every time it crosses the signal line. An upward movement across the line signals traders to buy and a downward cross signals traders to sell.
BetterTrades has recognized the potential power of moving averages as a technical tool and has made it an integral part of our technical analysis curriculum. Many of our BetterTrades coaches incorporate moving averages into their classes. By attending a technical trading course in Atlanta, you can learn more about moving averages and how to best employ them in your trading endeavors.
