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Moving Averages
To Measure Momentum

Using moving averages to measure momentum

Moving averages can be used to measure short term momentum, medium term momentum as well as long term momentum.

  • Short term momentum can be measured by using MA's with time periods of 20 or less.

  • Medium term momentum can be measured by using MA's with time periods of 20 to 100.

  • Long term momentum can be measured by using MA's with time periods of more than 100.
  • You can determine the strength and direction of a stock's momentum by placing 2 or more moving averages on top of each other.

    To measure the momentum of different time frames you will use different time periods.

    For example, to measure the medium term momentum I will use the 10 day MA, 20 day MA and 40 day MA. For longer time frames, I will use the 50, 100 and 200 day MA's.

    You can use whatever periods you like. It really doesn't matter what periods you use as long as you feel comfortable with it. There is no rule written in stone. As you progress in your learning, you will find the ones that you prefer and are suitable for you.

    Generally, the more popular periods are 10,20,40,50,100 and the 200 period MA.

    moving average 3

    This is how you do the analysis...

    Upward Momentum

    Take a look at the chart above. I have put the 10 day MA(blue), 20 day MA(red) and the 40 day MA(green) onto the chart.

    When you see that the shorter MA's(smaller period) are above the longer MA's, the stock is in an upward momentum.

    The momentum of the stock is considered to be strong when the MA's are diverging from each other and there is a distance between the MA's.

    Once you see that the MA's start to come together, it is warning that momentum may be slowing down. The stock may be taking a rest before resuming upward or it could mean that the stock will go down. We don't know yet, but what we need to do is be careful and be ready to take the necessary actions.

    So when you look at the chart above, you will notice that the momentum of the stock is strong from May to early June. In early June, the MA's start to come closer and that signals a warning that momentum may be slowing down.

    The stock then drop a bit in July before resuming an uptrend momentum in early August.

    moving average 4

    Downward Momentum

    When you see the shorter MA's below the longer MA's the stock is in a downward momentum. The other analysis is the same with the ones we discussed in the upward momentum.

    The momentum of the stock is considered to be strong when the MA's are diverging from each other and there is a distance between the MA's.

    Once you see that the moving averages start to come together, it is a warning that downward momentum may be slowing down. The stock may be taking a rest before resuming downward or it could mean that the stock will start to go up. We don't know yet, but what we need to do is be careful and be ready to take the necessary actions.

    Use it to see things clearer, not to make decisions.

    The proper way to use the MA's to gauge momentum is to use it as a tool to help you see things clearer. You use it for the warnings it gives you and also as a confirmation that the trend is indeed strong. Do not base your trading or investing decisions on it.

    Personally I find this way of measuring momentum very useful. However, I do not use it often. It helps you a lot when you are just starting out.

    I introduced it here as some beginners might find it useful when they start out. It is like training wheels on a bicycle. As you get more experienced, you may want to do without it.

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