Moving Average Technical Indicator
Definition
Moving Averages can be used to produce buy and sell signals for stock trading. When a stock crosses the moving average going up it is considered a buy signal, when the moving average crosses the moving average in a down move, a sell signal is given. The moving average is a good trend indicator but frequently produces whipsaws (i.e. as soon as a signal is given the stock immediately reverses direction and gives the opposite signal). The exponential moving average was designed to reduce some of these bad signals since a single day's large price movement affects it less. Also, check out the MACD Indicator (link here) since it is an extension of the moving average indicator designed to produce fewer whipsaw signals.
Simple Moving Average
A simple moving average is calculated by totaling the closing prices of a stock over a prescribed period (say, 30 days) and dividing that total by the number of days in the period (i.e., 30). The resulting number is the average. In order for the average to "move", the most recent closing price is added to the previous total and the oldest closing price used in that total is subtracted. The new total is then divided by the number of days of the moving average, and the process repeated.
Changes in the upward or downward trend of the stock being measured are identified by the stock price or index crossing over its moving average, rather than a change in direction of the moving average itself. According to the moving average theory, when a stock price moves below its moving average, a change is signaled from a rising to a declining market; when a stock price moves above its moving average, the end of the declining trend is signaled. A disadvantage of the simple moving average approach is that it will allow an extreme high or extreme low to distort the true value of the stock, possibly giving false buy or sell signals or rapid whipsaws.
Exponential Moving Average
To overcome the distortion caused by extreme highs or lows, the exponential moving average weights recent closing prices more heavily than earlier closing prices. Many market technicians consider the exponential moving average to be a more accurate indicator than a simple moving average.
To calculate an exponential moving average, Telescan first calculates a simple average for the desired period. Then it uses the following formula for each new moving average:
[Last MA Value * ( 1 - 2/L+1)] + [NP * 2/L+1]
Where:
MA = Moving Average
L = Length of Moving Average
NP = Most Recent Closing Price of Stock
For example, let's say the simple moving average of a certain stock over a 19-day period is 100 and the stock closed today at 105. If we plug these figures into the above formula (Last MA Value = 100, L = 19, and NP (New Price) = 105), the New Moving Average will be 100.5. The same formula is used to figure consecutive values for the remaining periods.
Interpretation
When the stock moves upward across the moving average value, a buy signal is given.
When the stock moves downward across the moving average value, a sell signal is given.
Portfolio Monitoring
Monitor the stocks in your portfolio for moving average breakouts by selected short-term, intermediate-term, and long-term technical breakouts from the portfolio bar. These signals can be used to time purchase or selling of your stocks. For example, if you copy the results of a search into your portfolio, you can wait to purchase any stock until they have a positive breakout. This can help increase the probability that you have a stock in an uptrend. Then you can hold the stock until a sell signal is given. Breakouts are calculated approximately every hour throughout the day.
Search for Stock with Moving Average Breakouts
You can search for stocks with various moving average values. Select moving average breakout from Prosearch. You can search for stocks with breakout in the last x number of days and can combine them with any of our other indicators. Also, you can find stocks the most above or below their moving average, or combine your search with other technical indicators. Click here for a description of moving average search criteria.
Disclaimer
Be aware that technical analysis is not foolproof and frequently produces bad signals. They should not be used as an automated buy and sell program but as a tool to enhance your probability of holding winning stocks. All technical analysis is based on mathematical calculations and, as such, no investment decision should be based solely on its conclusions. |
