Why is it Important to Keep an Eye on a Stock"s Moving Average?
A 'moving' average (MA) is the average closing price of a certain stock (or index) over the last 'X' days.
For instance, if a stock closed at $21 on Tuesday, at $25 on Wednesday, and at $28 on Thursday, its 3-day MA would be $24.
66 (the sum of $21, $25, and $28, divided by 3 days).
Since the most recent X-day period changes every day, so too will the value of the stock's MA.
The ongoing updates to the MA values are also sometimes called a 'rolling' average.
Moving averages are usually plotted on a stock's chart by those who are analyzing them, since their physical position in relation to the stock's price is the key to using them effectively.
As for how many daily prices a MA should incorporate, the chosen moving average length (or X days) should reflect the investor's intended holding period and time frame.
How is it Interpreted? First and foremost, investors should understand the purpose of a MA is to 'smooth out' erratic day-to-day price changes into something more discernible and consistent.
With that in mind, there are several ways to use them as an investor.
There are the three basic, core strategies though: 1.
Momentum Indicator - Is the MA pointing upward, or downward? It does indicate the bigger trend, after all.
2.
A 'Signal' Line - A stock that crosses above or below a selected MA line could be considered a simple 'buy' or 'sell'.
3.
Support or Resistance Levels - A stock that moves back towards a MA line may not necessarily cross it again; that moving average could also be a reversal point.
For instance, if a stock closed at $21 on Tuesday, at $25 on Wednesday, and at $28 on Thursday, its 3-day MA would be $24.
66 (the sum of $21, $25, and $28, divided by 3 days).
Since the most recent X-day period changes every day, so too will the value of the stock's MA.
The ongoing updates to the MA values are also sometimes called a 'rolling' average.
Moving averages are usually plotted on a stock's chart by those who are analyzing them, since their physical position in relation to the stock's price is the key to using them effectively.
As for how many daily prices a MA should incorporate, the chosen moving average length (or X days) should reflect the investor's intended holding period and time frame.
How is it Interpreted? First and foremost, investors should understand the purpose of a MA is to 'smooth out' erratic day-to-day price changes into something more discernible and consistent.
With that in mind, there are several ways to use them as an investor.
There are the three basic, core strategies though: 1.
Momentum Indicator - Is the MA pointing upward, or downward? It does indicate the bigger trend, after all.
2.
A 'Signal' Line - A stock that crosses above or below a selected MA line could be considered a simple 'buy' or 'sell'.
3.
Support or Resistance Levels - A stock that moves back towards a MA line may not necessarily cross it again; that moving average could also be a reversal point.
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