|By Nathan Young|
May 31, 2017
Moving averages are a great way to gauge where your equity is trading in relation to the averages over specified time periods. Typically there is the 200 period moving average, the 100 period moving average, and then the 30 period moving average.
The benefit of using a moving average is you can set it to any time period you like. If you are a day trader and need quicker movement, you can set it for a 5 or 10 period average. With moving averages, many people use them as an indicator of when to enter and exit trades.
One you may see from time to time is when the 200 period moving average is crossed with a 50 day moving average or 30 day moving average. This can be an indication that it is time to look at directional moves and see if you can find a trade. This is great for investors too because you can watch where you stock is compared to the 200 period moving average and see if it is over extended or over sold.
With benefits come a few drawbacks, and one of them is all the data is in the past and is not forward looking. This will only tell you where price has been and not really give you an indication to where price is going to go. A way to use it could be to see how price reacted over a business cycle and see if it will react that way again in the future.
This is a technical indicator and not so much a fundamental because it does not take into account any fundamental data. So if the company is doing well but price is trading below market average, the moving average will not know the company is doing well, therefor not represent the current price well.
Be sure to test these out on a demo account first to get familiar with them and understand if they will fit your current trading and investing profile. If not, at least you have the knowledge of what they do and you may use them in the future. Reach out to an investing community and bounce ideas off of people and see what they say. Knowing the latest ways these are being used may give you an edge in your trading and investing.