Moving averages are very important for traders to understand, as they can be a key catalyst when looking at stock charts. Today we will go over some of the basics, and as time progresses we will go in much more depth.....
Now what are moving averages? They are just some bogus thing people put on charts to look cool right?
Not exactly! Yes there are some people that load up their charts to look "cool" in our opinion lol, but moving averages are extremely important. The reason for this is because they help you identify trend. They can also help you identify potential buying and selling opportunity as well. Now take a look at the chart above before reading on. Just take a look and see what you think is going on even if you have no idea! Promise it will make more sense by the end of this blog post.
When it comes to charts, traders have their own opinions on moving averages. Some use only one line, where others use multiple. We like to use 2 because it gives us a stronger sense of trend in our opinion. In the above figure there are 2. One is the 20 day Simple Moving Average (Green) and the other is the 50 day Simple Moving Average (Blue). The 20 tracks prices the last days, while the 50 tracks prices the last 50 days, simple enough right? We are going to post the same picture below so you do less scrolling.
Now when you have these 2 lines plotted its time to analyze what they mean. You can see above all the areas we put a yellow circle. These areas are called "crossovers." This simply is areas where the moving averages have intersected. These are important because they help show you potential trend of the stock. What we like to look for is when the 20 (green) is crossing above the 50 (blue), you can see that outlines above in most of the circles. After that intersection has occurred, historically the stock has trended up in price. Think of a trend as something you do in real life. The reason we look for the 20 to cross above the 50 is simple.... For example say your a guy dating a girl. You have 2 girls in mind, one you were hanging with the last 50 days, then one you were hanging with the last 20 days. Chances are the one you have been hanging out with the last 20 days you will look to be hanging out with more than the one the previous 50 days. Thats exactly how this trend works and why we look for that crossover. If the 20 is crossing above the 50, then a new trend may be occurring! Historically this stock preforms well with that crossover.
Now it can work both ways which is great. Look at the 3rd to last yellow circle. This is an example where the 20 CROSSED BELOW the 50. Think about the girl scenario now lol. You have been hanging with this chick for the last 20 days but maybe your getting sick of her shenanigans. You have thoughts of visiting the other girl instead. Historically this stock has gone down when the 20 crosses below the 50! This a great tool to look at when looking at charts. Now it's important to understand that all charts wont be like this. Some stocks act different than others and may not trade as well off these moving averages. That's why it's important to get a handful of stocks in mind and chart all them. See which ones act the best historically to these crossovers. When the 20(green) crosses above the 50(blue) it's considered a "bullish crossover" and when the 20(green) crosses below the 50(blue) it's considered a "bearish crossover." In trading Bullish = up, where Bearish = down in price action.
Now as we discussed this blog post is meant to be an introduction to moving averages, so hopefully it helps you understand it a little better with the girl example lol! You can collect 10 different stocks and chart them all. See which ones historically react the best to these crossovers.
Please note moving averages are not an exact science, but they definitely help. If it was an exact science everyone would make money right? That's why it's important to see which ones historically acted the best from this method of technical analysis.
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