|By Nathan Young|
May 17, 2017
Moving averages are an excellent tool to add to your technical analysis as it can give you an idea of where the price is on average. The difference between the moving averages is essentially the formula used to generate the data.
When looking at the moving averages, you can find which one suites you best, but I want to go over what makes them worth your time. Averages are great to help get you in the general ball park of where you need to be in the chart, allowing you then to get specific where you need to.
Using the weighted moving average will allow you to find a target price that may be closer to a realistic move. Not only that, the moving average could tell you when the market is shifting because if the moving average is smoothing out, the stock may be stuck in a range that does not deviate too far from the mean.
Another way this can be used is in mean reversion theory, which is a fairly popular among traders and investors alike. Being able to help strengthen a type of trading or investing is always ideal because it brings more validity to your methods. There are many different ways to implement mean reversion theory so be sure to complete research if you are new to this term.
Lastly, you can pick different moving average periods to allow you vision of how the stock moves relative to different lengths. The moving average may smooth out over 200 periods compared to the 50 period, which may be choppy. Using those together could really help you decide on market trend and other directional indications.
Using moving averages is great way to increase you trading and investing knowledge and it can also increase you accuracy in trend direction. Test it on a demo account first to fully understand if the tool will work with your current setup, because if it doesn’t you wont have lost large sums of money but will also have a knowledge of a great tool you could use farther down the road.