Trading 101: The ins and outs of moving averages

Julie Brownlee, Fsp Invest, 11 Aug. 2015

Tags: moving averages, what are moving averages, how moving averages work, using moving averages, trading,

One popular tool many investors and traders use is moving averages. They gives investors a way of analysing share prices and the prices of other assets.

So what are moving averages? How do they work? And how can you use moving averages?

Read on to find out…

What are moving averages?

Moving averages give you an insight into the broader share price trend over a specific time period.

Let’s take a look at an example…

Say Company ABC’s closing prices for a week are:

  • 100c;
  • 120c;
  • 80c;
  • 100c; and
  • 110c.

This gives an average closing share price of 102c ((100c + 120c + 80c + 100c + 110c)/5).

The following week, the share price dips to 80c. This brings the moving average down to 98c ((120c + 80c + 100c + 110c + 80c)/5).

This shows you the overall price trend is down, confirming the last closing price of the share.

How you can use moving averages

If you use a short moving average like the one in our example along with a longer one, you can get a good picture of the market trend.

Let’s say the 50-day moving average for the JSE’s All Share Index was moving up quickly, but it remains below its 200-day moving average.

If the 50-day moving average crosses above the 200-day moving average, this is a bullish signal. This is known as the golden cross.

But if the 50-day moving average crosses below the 200-day moving average, this is a bearish signal. This is known as the death cross.

Our examples use simple moving averages. You also get exponential moving averages. Exponential moving averages give more weight to recent share prices.

So there you have it. The ins and outs of moving averages.

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