A Moving Average simply plots the average share price over a specified number of periods (e.g. 200 days). The values plotted on the chart are calculated by taking the sum of all prices over a given timeframe and then dividing by the number of periods (in this case 200). The period used depends on the timescale of the chart but is generally days, weeks or months, or an intraday period like minutes or hours.
Trading signals can be generated by comparing the shorter-run MA to the longer-run MA.
Traders typically use the 50-day MA for the shorter-run MA and the 200-day MA for the longer-run MA.
When the shorter-run MA rises above the longer-run MA, this is generally considered a bullish signal, showing that the stock is in an uptrend.
On the other hand, when the shorter-run MA drops below the longer-run MA, traders regard this to be a bearish signal, indicating a downtrend.
Traders can also generate trading signals by comparing the share price to the Moving Average (MA)/strong.
When a stock is trading above the Moving Average, this is generally considered a bullish signal, showing that the price is trending upwards.
Conversely, when a stock trades below the Moving Average, traders typically view this as a bearish signal.
Many traders compare the price to the 200-day MA, although different practitioners prefer different timeframes.
For example, in emSecrets for Profiting in Bull and Bear Markets/em Stan Weinstein notes his preference for the 30-week MA for buy-and-hold positions and the 10-week MA for short-term traders.
He adds that ‘stocks trading beneath their 30-week MAs should never be considered for purchase.
Stocks trading above their 30-week MAs should never be considered for short selling’.
How many periods (eg. days) to lookback to calculate the average - Which type of moving average to use? Simple, Exponential, or otherwise.