Moving averages are useful for a variety of uses, so let’s get it straight. I am a big believer in the value that moving averages have to the market itself, and even though I have been teaching stock market analysis for many years, I still don’t always use them. My students tell me they would love it if I showed them a moving average.
This is an example of moving averages on a chart of $100 and $110. The $100 on the chart is plotted on top of the $110, indicating a movement of about 20. The $100 on the chart is plotted right above the $110 so that when it is plotted below that, it doesn’t move as much in value. Because it is plotted at about an equal distance left of the $110, it is difficult to tell if the $110 moved, or if the $100 did, but since the chart is drawn at an equal number of zeroes in any direction you can see that the $110 moved, and vice versa.
Moving averages are particularly useful for understanding how much something should move when two stock prices are moving in different directions. When there is a large amount of stock trading happening in a given asset area, it is a good idea to show two moving averages, one which represents all the trading occurring in that market, and one which represents all the movement taking place in that market.
What’s great about having two moving averages is that they are very similar in the way that they indicate the direction a stock is moving in as compared to just one. Moving averages would probably be an example of the best of two bad options since they represent two different movements. Even though the $100 on the chart below shows up as moving below $110 on this chart, and the $110 on the chart below shows up as moving above about $110 (and vice versa), once you get past the first $100 the pairs can still move in the same direction. So with moving averages, it is always good to know the direction from which two moving averages move, and you can even use it to see if something is going to move in a direction you want to go down (the $110 will tend to move down) or up (the $100 will tend to move up).
For example, if there are a large amount of market trading happening in the equity markets, one would expect a moving average chart to show a strong move downward in the case of a $110 move. In the case of the two types
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