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Introduction to Moving Averages
An indicator used in technical analysis to smooth price data and help confirm market trends. It reduces the effects of sharp, isolated price movements and shows the underlying trend more clearly. It is calculated by adding together closing prices for a particular period and then averaging them. As time passes, the oldest price is dropped and replaced by the latest one.  The two most common types of moving averages are Simple Moving Average (SMA) and Exponential Moving Average (EMA). Moving averages are used as tools to create the Moving Average Convergence Divergence – MACD and Bollinger Bands

        

Calculating Simple Moving Averages (SMA)

A simple moving average or SMA, Is a price line that smooth’s out a investments path to get an indication of the trend. For example, if  a closing prices over the last five days are $37.00, $36.00, $34.00, $32.00. $31.00 then the SMA would be $34.00 derived from adding all the closing prices then dividing by five. This would create a five-day SMA that could be monitored for trends. The most common moving averages are 20, 50, and 200 days.

Calculating Exponential Moving Average (EMA)

An exponential moving average, EMA, is very similar to a simple moving average, but it places more weight on the more recent prices than on past one, making it more receptive to changes in the stocks price trend. This means it reacts more quickly to recent price changes than a simple moving average.

AIR METHODS CORP 50 Day EMA

Moving Average Crossover

The point at which two moving averages, one with a short interval and the other a longer one, intersect. Technical analysts interpret moving average crossovers as significant buy or sell signals.

Summary of Moving Averages

Technical analysis claims to be able to forecast future market movements solely through the study of past market price and volume data. It contrasts with market forecasts based on the analysis of the fundamental factors influencing supply and demand for shares, currencies or commodities, so-called fundamental analysis. Technical analysts, also known as technicians or chartists, try to identify price patterns and trends in financial markets and exploit them. They search for chart patterns such as head and shoulders or double top reversal patterns, study indicators such as moving averages and look for chart support and resistance levels. Major investment banks and brokerages normally employ technical as well as fundamental analysts. One of the major technical analysis tools used is the moving average.

Investing Videos 

How to use
Interactive Charts

Investing using
Candlestick Charts

How to invest using
Bollinger Bands (1)

How to invest using
Bollinger Bands (2)

Introduction to Relative Strength Index

RSI does the following:

It compares an investments current situation with its own history.
It fluctuates between 0 and 100
Readings over 70 are overbought
Readings below 30 are oversold
It oscillates up and down in a wave pattern
One of the best Technical Indicators used by investors

Investing with On Balance Volume

OBV attempts to detect when a financial instrument such as a stock or bond that is being accumulated by a large number of buyers or sold by many sellers. Traders and investors using technical analysis will use an upward sloping OBV to confirm an uptrend, while a downward sloping OBV is used to confirm a downtrend. Finding a downward sloping OBV while the price of an asset is trending upward can be used to suggest that the "smart" traders are starting to exit their positions and that a shift in trend may be coming

In the example below, Coinstar stock has a low on-balance volume when the sotck is trading under $ 20 in October 2005 indicated by the blue circle. Then notice the OBV uptrend at the start of the uptrend for the stock. Additionally, notice that in November 2007, when the stock is trading above $34, the OBV is hight. then it begins a downtrend in January 2008.

Long Term Investing and Stock Charts

Dollar cost averaging (also known as DCA) is an investment strategy that may be used with any type of investment. It works by investing equal amounts regularly and periodically over specific time periods, like   $100 very month, in a particular investment or portfolio. By doing so, more shares are purchased when prices are low and fewer shares are purchased when prices are high. The point of this is to lower the total average cost per share of the investment, giving the investor a lower overall cost for the shares purchased over time.   

However, to get the best purchase price it is beneficial for an investor to not only dollar cost average, but to also purchase additional shares in a stock, or mutual fund, when the shares are lower. This will result in the better investment returns.  This scenario can be seen in the example below where the S&P500 is lower on March 9, 2009.  This lower purchasing opportunity can be assessed by the green signals in the RSI below (bottom blue circle).

If an investor had added more money to the S&P 500 during this time, they would have bought shares at a very low price. This results in a much higher returns over the long term than simply dollar cost averaging would by itself.  Using both methods of DCA and buying additional shares when the market is low, will result in much better return than DCA would by itself.

Long term investing is beneficial to investors because it can lead to positive gains in the stock market with very little risk.  This happens because investing for the long term in the stock market in stocks such as those in the S&P 500 can result in an aver annual gain of 12% over the long term. This is based on the fact that the S&P 500 has returned an average annual return of 12 % since 1926. With this kind of return an investor can expect their investment to double every six years. This is concluded by using the rule of 72; divide any return into 72 and you get the number of years it take to double an investment. Hence, 72 divided by 12 equals: 6. Therefore, it’s easy to see that long term investing is something that every investor should do.  This can be done easily with dollar cost averaging. 

What is a 200 Day Moving Average?

The 200 day moving average is possibly the most popular of the moving averages. Because of its length, this is clearly a long-term moving average. Next, the 50-day moving average is quite popular for a medium term trend of a stock. Many chartists use the 50-day and 200-day moving averages together.
In this example below, Halliburton starts trading above its 200 Day Moving Average on September 2010. At this time the uptrend starts and the stock continues to rise and remain above its 200 day moving average.

A stock that is trading below its 200 Day Moving Average is in a long term downtrend. The stock is generally considered as unhealthy, until it breaks out above its 200 Day Moving Average. Some traders like to buy when its 50 day moving average crosses above its 200 Day Moving Average.

A stock that is trading above its 200 Day Moving Average is in a long term uptrend. This is considered to be a healthy indication. A healthy stock will generally have a rising 200 Day Moving Average. When its 50 day moving average crosses below its 200 Day Moving Average, it is called a Death Cross.

The 200 Day Moving Average often works as a major support level in a bull market. This can present a low risk opportunity to buy a stock. However, a break below it can lead to a large trend downward. In a bear market, the 200 Day Moving Average often works as a major resistance level; however a break above it can lead to a sharp rise.

 

In a bull market, a buying signal may be generated as the stock dips close to the 200 Day Moving Average and a sell signal may be generated when it goes far above its 200 day Moving Average. In a bear market, a buying signal may be generated when it dips far below its 200 Day Moving Average, and a sell signal may be generated when it rises close to its 200 Day Moving Average. However the opposite signals may be generated on strong breakthroughs of the 200 Day Moving Average.

The 200 Day Moving Average is a long term moving average that helps determine overall health of a stock. Furthermore, the percentage of stocks above their 200 Day Moving Average helps determine overall health of the market. When this number gets below 20%, many traders look for a sharp reversal in the market that can quickly bring the number up to 40%. When this number gets above 85% or 90%, many traders look for a reversal in the market.