What is the Moving Average (MA) indicator?
A moving average is one of the most popular technical indicators used by both active traders and value investors. It's a visual trend spotter that helps to identify entry and exit price points by smoothing out small price fluctuations over a period of time.
How is moving average helpful in trading?
A moving average smooths out random, short-term fluctuations in the price of a stock. This helps traders identify trends in the stock price, and helps to find the support and resistance levels of the stock.
The time period for a moving average can be customized. In moomoo, you can see the moving average for the past 5 days (MA5), 10 days (MA10), 20 days (MA20), 30 days (MA30), 60 days (MA60) and 120 days (MA120). That said, most traders tend to study the 20-day, 60-day and 120-day trends based on their trading objectives. Shorter time periods are better suited to short-term trading as more recent price trends are most relevant to quick buy and sell decisions.
Protips on using a moving average
Two things to keep in mind while reviewing a moving average are:
● A rising moving average indicates that the stock is in an uptrend i.e. prices are rising. A declining moving average indicates that the stock is in a downtrend i.e. prices are falling.
● A bullish crossover i.e. when a short term moving average crosses above a longer term moving average, indicates an uptrend. A bearish crossover i.e. when a short term moving average crosses below a longer moving average, indicates a downtrend.
Example
In the example below, we see the price movements of $COIN over the past 1-day, plotted against the moving average for the past 5 days (MA5), 10 days (MA10), 20 days (MA20), 30 days (MA30), 60 days (MA60) and 120 days (MA120). $COIN's current price is below all of these moving averages making this a good entry price point to buy.
Types of moving averages
There are two types of moving averages - Simple Moving Average (SMA) and Exponential Moving Average (EMA). A Simple Moving Average simply takes the mean of stock prices over a given period of time i.e. equal weight is given to all prices. An Exponential Moving Average gives more weight to recent prices, which is why some traders prefer to use the EMA. In moomoo, SMA and EMA can be seen below the average cost line.
For more investment knowledge and trends, welcome to Courses on the Community.
