Moving Average is basically an indicator that is required for the purpose of conducting a technical analysis that further displays the security’s price average value over a definite period. Moving Average is often utilized for measuring momentum and also for defining areas of resistance and support. Moving averages are utilized for emphasizing a trend’s direction and for smoothing out volume and price fluctuations, which can result in misinterpretation.
Using Moving Averages in Trading
Moving Average helps in defining the trend and recognizing changes within the trend.
1. Gauging the overall trend: Moving averages show a smooth line in the overall trend. Thus, if the moving average’s term is longer then its line will be smoother. For the purpose of gauging the trend’s strength, you will have to keep an eye on the trends. If the trend is upwards then the short term averages must be above the long term averages. Thus, a trader should be on the lookout for opportunities for purchasing when the prices are low instead of taking a shorter position.
2. Confirming of price action: The traders should always keep an eye on the market patterns and trends. They should enter only when the bullish trend has disappeared.
3. Crossovers: The moving average crossover trends lag the existing market’s action. This because the moving averages provides us with an ‘average’ price over a certain time period. Thus it represents the actions of the market only after some time has passed. When the shorter moving average crosses above and over the longer one, this is considered to be an upward trend.
The crossovers of moving average produces results that are more trustworthy and reliable in a trending related market, which tends to achieve either new lows or new highs. In a market that is bounded by range, the moving averages may cross each other a couple of times and can provide us with false trade related signals. Thus, it is important to identify the market as either range or trending bound.
Why Moving Average Matters?
The Moving Average is seen as the line that divides the stock, which is healthy technically and the stock that isn’t. In addition to this, the stocks percentage that is above the moving average helps in determining the market’s overall condition and health.