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How to use moving averages when investing in shares

by , 23 October 2015

If you're a long-term investor, you may be more inclined to use fundamental analysis over technical analysis.

If this is how you approach investing, you may find it useful to add this technical indicator to your investing tool kit.

This technical indicator is moving averages. They can be very useful.

Let's take a closer look…


When to start investing in shares


If you’re about to put a large amount of money into the stock market or want to add to some of your holdings, the last thing you want to do is to invest just before the market falls.

Whilst you can’t avoid this risk entirely, you can use moving averages to give you a good idea about what’s going on in the stock market and whether or not it’s a good time to be investing in shares.

The 200 day moving average lets you see the market’s long-term trend. It averages out the closing prices from the last 200 days, smoothing out daily price volatility.

When the markets are in a strong upwards trend, you tend to find stocks trade above their 200 day moving average. When the markets are in a strong downwards trend, stocks tend to trade below their 200 day moving average.

If the 200 day moving average is starting to change direction, it can indicate a new big trend is underway.


How to use moving averages when investing in shares


Use the 200 day moving average to see what the trend is. If it’s looking downwards, be wary about investing in shares. If the trend changes back into an uptrend, then you have more confidence that the market will continue to rise.

If an uptrend returns, you want to see the following things, Brian Hunt and Ben Morris in The Crux explain…

  1. The market break above its 200 day moving average;
  2. The 200 day moving average moving higher; and
  3. The market break its previous old highs.

So there you have it. How to use moving averages when investing in shares.

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How to use moving averages when investing in shares
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