Technical Side: Moving Average

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I may not be the right person to discuss technical analysis stuff about stock/forex investing but after reading from a few FB post, blogs, and even seeing it in Youtube Vlogs, I believe you too need to learn from this simple indicator.

Moving average(MA) specifically Simple Moving Average(SMA) is a powerful indicator that will help you figure out what strategy to take for the stock you are holding or planning to buy. In simple terms it is line formed from the  average price of the stock on a certain number of days. Plotting the moving average gives you a smooth line instead of the jagged stock price due to the ups and downs of stock price. The key to this indicator is the period you are basing your moving average. Longer periods does not reflect current prices but shorter period on the other hand might end up into a jagged line and not giving you that smooth line that will in one way or another show trend for the stock.

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So far, the important periods are 9 days, 20 days, and 200 days. Again Moving Average(MA) takes the average of the number of days indicated and 9 days is the shortest period that fits the purpose. Basically it is a one and a half week average of the stock. The 20 days is more of a month average and the 200 days is about half-year average. With these in mind, you will notice the relationship of the three moving averages. For short-term analysis you will focus on the 9 days moving average(MA9), for monthly analysis it would be the 20 moving average(MA20). Comparing these two will help you at least see the trend the stock price is treading. A stock’s daily price will clearly somewhat be mirrored by the MA9 but MA20 will show the general trend of the stock and at times may deviate from the MA9 thus showing you a bigger picture of the trend. These two may act as well as a point of reference for your support and resistance. Once the stock breaks out from the MA9, a further confirmation could be made with MA20. MA200 on the other hand may be use on the wider trend analysis. One can use it as an indicator if the stock is already on its bearish or bullish trend as it shows a longer period.

Typical analysis to use these with are moving average crossover. There are two types of crossover: Price crossover and Moving average crossover.

Price Crossover happens when the moving average line crosses the price bar/candles. It is a signal to buy or sell. MA9 is the commonly use moving average for this type since it gives you the most current average of the stock. When price bars/candles goes above or crosses the MA9 up, it signifies a bullish trend thus a good entry point to buy the stock. Again as always, make sure to confirm such with the volume if such will push through which you can also confirm if the succeeding bars or candles will close at a higher price. A bar/candle crossover under the MA9 indicates a bearish trend thus signaling to sell.

Moving Average Crossover happens when one moving average crosses another. A pair of moving averages(short period and median period) are used and crossovers between these are made into buying and selling points. The most used are the MA9 and MA20. When the MA9 crosses above MA20 it indicates a signal to buy. This is a sign that an uptrend is coming thus buying now while it is low is good time to position. When MA9 crosses below MA20 it is time to sell since the trend is seen as a downtrend and it is best to sell your stock while it is still at its highest price. Again always make sure to check confirmations of this signals before buying or selling. Volume is the usual confirming item when making a decision to buy or sell.

I hope this gives you somewhat an idea on how to use the indicators most Chartist babble in their post in chatrooms. At times, we simple-minded stock investors find ourselves clueless when traders are scrambling into one stock when there is a particular movement in the stock chart. Remember that the simpler it is the better you can understand and hopefully the better you can position your investments for those bagger trades.



About the blogger

Louis Delos Angeles is a Certified Public Accountant, blogger behind Investing in Philippines, and author of Investing in Stocks: Preparing for the future small amount at a time. Check him out in Google+ Learn more about Louis and his financial freedom advocacy here.

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