After the recent turmoil, we’re looking for a new “moving average”. This new benchmark should make our strategy more flexible, and therefore safer.
As we move up, it will be easier to buy on our way down. As we move up, it should be safer to sell on the way up – and vice versa.
The new moving average will be a more appropriate benchmark for our strategy.
How much should the stock moving average affect your portfolio?
There are only a few factors that affect your portfolio. All the others are irrelevant to the topic
The moving average of the stock you’re following will not change anything about your portfolio. However, the price of the stocks in your portfolio will be impacted.
You will have a slight advantage relative to the other stocks in your portfolio. When the moving average of the market (which is the price of an index divided by the number of shares) is high, you’re looking at a good chance of getting better investing returns than if your portfolio wasn’t volatile. But when it’s low- it’s extremely dangerous.
There are many reasons why the price of an index may be low or high. One of them is called momentum. Stocks change their price very often over the short term. Over many years, there are no significant changes in prices, which means you cannot make profit off of it unless prices increase dramatically.
You should therefore always be looking for opportunities to sell your shares when the moving average of the market is very low.
Another reason for the price difference between the moving average of two companies is whether you are watching the prices as they move within a larger group or the price of the larger group. If you are watching the stock prices within a larger group, you are able to profit off of the greater movement in the price of the larger group to help you out when the price of the entire group drops. When you are looking at the price of the larger group and the price of the group itself, however, you are only able to profit off of the smaller movements of the larger group. This allows you to increase your profit margin by only paying a smaller percentage of the price differences between the larger group and the smaller group.
There are many other reasons that the price of the moving average will be affected by the market. Those aren’t important but we’ll cover them in detail below
How to interpret the price of an index?
We’ve previously explained how an index works here.
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