Use moving averages to check the trend
By using moving averages
you’re getting the average price of a share or other asset over a specific period of time.
Take the simple moving average (SMA). You can use this to check the trend of a stock.
If the moving average rises from left to right, this means a stock is in an uptrend. If it falls from left to right, this means a stock is in a downtrend.
Use moving averages to find support and resistance levels
As well as using moving averages to determine trends, you can use them to find support and resistance levels, Tom Gentile in Money Morning US explains.
Support levels show you where a stock is unlikely to trade lower in price. For example, in a downtrend, a support level will see traders buying in at this level, sending the price higher again.
Resistance levels show you where a stock is unlikely to trade above in price. For example, in an uptrend, a resistance level will see traders selling at this level, sending the price lower.
Let’s say you’re entering into a long position. You can buy the stock when it hits the support level and sell when it rises to the resistance level.
Moving averages in action
Have a look at the chart below of the 200-day SMA on the share price chart of Nike…
From the moving average you can see that Nike’s share price is in an upward trend. You can also see that the 200-day SMA is a support level for the share.
By using support and resistance levels to trade, you can use the 200-day SMA for your stop loss. If a stock trades below this, it’s a sign that it’s time to cut your losses and exit a trade.
Different stocks perform better to different periods of time to use your moving average over. Have a play about with the stocks you trade to find the best one to use.
So there you have it. How to use moving averages as part of your winning trading strategy.
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