How Stock Analysis
Using Moving Averages
Help You Choose Stocks
In 5 Seconds
Can you really do stock analysis in less than 5 seconds? Well, the previous pages have already shown you that you can. The powerful moving average can help you find good stocks by filtering out the bad ones.
When I look at the chart of a stock, I will know in less than 5 seconds whether it is a good candidate or not. By looking at the location and direction of the moving average from the stock price, you will know whether to invest in it or not.
Here is another use of the moving average which will greatly aid you in your stock analysis...
Moving average (MA) to identify whether the stock price is overbought or oversold
You can identify whether the stock is overbought or oversold by again looking at the location of the moving average from the stock price.
To do that, I use the 20 period MA for shorter term reversals or the 50 period MA for longer term reversals.
Take a look at the chart above with a 50 day MA.
Imagine that the stock price is a lion and the moving average is like a rope tied around the neck of the lion. The other end of the rope is tied to a tree.
No matter how far the lion tries to go, it can never leave the tree. The lion will always return to the tree, because everytime it tries to run away, the rope snaps it back.
The same thing happens to a stock. The stock can never move away from a moving average forever. It will always come back to the moving average. It is just a question of when.
So how does this analysis help you?
When you see that a stock price has been 'unusually' far away from its 20/50 day moving average especially after an extended time, you should be careful. If you are considering buying the stock, perhaps you might want to do a bit more analysis before putting in your money.
This helps you to be realistic. Remember, a stock will not go up forever. Yes, the trend may be up in the long term but you also need to be realistic in the short term.
The chart above shows that Google has been going up and up from September to November. However, if you had paid attention, you would have noticed that the price has been far away from its 50 day MA for a long time.
It may still go up, who knows? But if you are wise you might want to consider taking some profits or at the very least you should not be following the crowd blindly and keep on buying and buying.
From January to March, Google has been falling and falling. However, if you had paid attention, you would have notice that the price has been far away from its 50 day MA for a long time.
That does not mean you should buy it. It just shows you that...maybe you should start to pay more attention to that stock and look for possible buying opportunities.
This analysis actually sets the foundation for the understanding of an indicator called Bollinger Bands. Bollinger Bands is a very popular indicator and is used by many traders. I will explain this indicator in another article.
Summary of using moving averages
I have shown you in this page and the last two pages how to use moving averages to do stock analysis. There are actually many more ways to use the moving averages. That will be the subject of other articles.
In summary, moving averages are a great way to help you in deciding which stock to invest or trade. However, use it as a stock analysis tool to help you see things clearer.
Never use it on its own to make an investment. It is when you combine this knowledge with other tools, your investing or trading will improve.
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