| The Investrio Wall Street Mentor Center Our Executive Mentors provide investor education, product enhancements and software solutions on how to become a more successful trader. Understanding the Stock Market The purpose of this article is to provide you with invaluable insights into the Stock Market. Today's Topic: MOVING AVERAGES Previously we have talked about trend lines and determining what type of trend our broader markets fall into. This is simply done by making sure that each low is higher than the previous low. This can be seen by drawing a line under these points showing support for the trend. This is a bullish or uptrend signal. If each high is lower than the previous day’s high then we are in a bearish or downward trend. This will help determine areas of strength or weakness in the market and help you strengthen your portfolio. Another added indication of a bullish or bearish market is the moving averages. These are lines that are used to determine trend. They are created by taking a number of days, averaging them and placing a point at that average. Every new day that is added to the average requires the last day in the average to be dropped. So if we have a 10 day average, the price of the stock within those 10 days are added together and averaged to give you a point on a line. So how are these effective? One thing that averages help to eliminate are extreme outlying values and help you to see what the typical trend of a stock may be in. One thing that occurs when using averages is the shorter the average, the quicker the line can change direction and the tighter it hugs the price action. The moving averages that most investors use are the 5 day, 10 day, 20 day, 22 day, 44 day, 50 day, 88 day, 100 day and 200 day averages. We will focus on the 20 day, 50 day and 200 day averages. The 20 day is used because it reflects the average of trading days within a month. The 50 day is typically a quarterly measurement and the 200 is a yearly measurement. By using these, one can begin to see the trend for the month, quarter and year. So how do we use the trend lines in correlation to the broader markets? One way is by watching for 20 day 50 day moving average crossovers. An indicator of a bullish market is when the 20 day (blue line) moving average crosses over the 50 day (red line) on an upward trend. This tells you if the broader market is bullish (an upward trend). Once that is determined, now you can start looking for stock within that broader market to invest in. If you are taking advantage of the short side or bearish side of the market (a downward trend), we watch for the 20 day moving average (the blue line) to cross down through the 50 day (the red line) on a downward trend. This is typically a bearish signal and one can typically anticipate a fall in the market. Trend line chart. Focus on when the 20 day ( blue line) crosses the 50 day moving average (red line). This is your bullish bearish signal With the combination of trends and moving averages, you can now start to determine where the stronger broader markets are found. Find one with a strong uptrend if possible and support that up-trending market with a crossing of the 20 day moving average over the 50 day moving average. This will help you minimize your risk and maximize your gains. Next week we will discuss sectors and industries and show how they help you to narrow down the area best suited for investing. This process of starting big and then going small will help you tremendously when determining the areas to invest. If you have a question, comment or suggestion for one of our Executive Mentors, please CLICK HERE THE INVESTRIO MENTOR CENTER |
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