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What Are Moving Averages and How To Use It To Buy Stocks

18 Aug 2023

Introduction 

The moving average is a commonly used technical indicator that identifies the stock price trend. The moving average tracks the price crossover and generates trading signals for the traders. 

Let's look at a detailed description of how traders use the moving average to buy stocks. 

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What are moving averages?

Moving averages is an integral part of trading, as it is widely used in the technical analysis of stocks while trading. 

  • Traders looking to prevent losses and earn huge profits use these indicators to calculate price movement and future stock trends. 
  • It is calculated for a specific period by removing unnecessary noise and calculating any sequential data set to fund the average value of the stock. 
  • Traders use short-term MAs like 7 days, 20 days, or 30 days to make their short-term trading decisions, especially by intraday traders. 
  • Long-term MAs, like 200 days, are used for long-term investments. 

How to use the moving average for buying stocks?

The trend line created by the moving average cuts down the fluctuations of the price chart and allows traders to have a clear estimation of trends and price movements. Let's understand how moving averages have been used while buying stocks.  

Test the nature of the trend: Bullish or Bearish

One proven technique to test a trend's nature is moving average crossover. In this method, traders compare a stock’s short-term MA to its long-term MA. 

So, if a stock’s 50-day MA moves above its 200-day MA, then it is safe to say that the stock is bullish, and the stock will also touch the support levels of the long-term MA, confirming the price rise. And if it falls below the 200 MA, the stock is bearish. 

As a support or resistance level 

The long-term and short-term moving averages can be used together as resistance and support levels of stock. These levels, when breached, are strong indicators if one should buy or sell the stock. 

The support and resistance levels also define the holding period of the stock. So if a stock bounces back from the support level and falls back upon reaching the resistance levels, it is safe to stay invested in the stock and open fresh positions when it reaches the support level again.

Price estimation 

An upward trend in the moving average indicates that the price of a stock is likely to rise. However, if the trend is downward, it indicates that the price of stocks is more likely to fall. 

Key takeaways 

Moving averages are used as technical indicators while buying stocks. They are used to indicating the trend, the nature of the trend, and price estimation, and play an important role in the whole process.

 

Related articles - What Is a 7-Day Moving Average How It Helps Traders | What Are The Types Of Moving Average | What Is Moving Average And Formula To Calculate Moving Average | What Is the 200-Day Moving Average and How Does It Work | All You Should Know Aboutv 50 Day Moving Average

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