|By Nathan Young|
May 18, 2017
Moving averages are an important aspect to many investing strategies, and a great way to determine where the market is in respect to averages. The eight period moving average is a tool that will plot the average of the last eight period on your chart.
Keep in mind that these are just averages and may not be representative of every movement in the market. Typically the eight period will be choppy and wavy because it is only take the last eight periods of data, which does not give it chance to smooth out.
One way to utilize the moving average is to learn and understand mean reversion, which states that price or data will typically revert back to the mean. So if you see that price is far away from the moving average, this could be an indication that price is ready to pull back closer to the mean. You can set the moving average to whichever period works best, but for traders and people who are not looking for much in the way of the past, the right period moving average is plenty.
Another way the tool can help you out is if you are looking for trend in a stock or equity. If you see that price is below the moving average, it could be an indication that it is ready to bounce back, but this not a guarantee. Find ways to incorporate this with your current setup, as it may complement what you are doing already.
Typically, people use the 20, 50, and 200 period moving averages as these allow you to see every aspect of price and where it has been in the past. These again are not certain signs and indications of where price should be, because they do not take into account any fundamental data which is a large driving force behind price.
If you get stuck, reach out to an investing community and bounce ideas off of people and see how they react. Also, you can search the Internet as there is nearly unlimited amount of research and data about how to properly use this tool. Test it on a demo account first to understand how it works and you want lose money. All in all, this is a wonderful tool and could be a great addition to your charting.