|
A great way to identify and measure the trend of a stock is by
using moving averages. A moving average is simply an average of
closing prices over a specified time span. Charting software
really makes your job easier as all you need to do is specify
which time frame you want and the software does the rest. It
will lay a smoothed line across the chart for you. You can now
see whether or not a trend exists and in which direction it is
heading. If the moving average is moving higher and the price of
the stock is above it, then the stock is in an uptrend. If the
moving average is heading lower and the price of the stock is
below it, the stock is in a downtrend. As you can see, this is
fairly elementary. Making money is not that difficult when you
keep it simple.
If you want to look at trends over a short, intermediate, and
long-term basis it will be necessary to use different moving
averages. For the short term trend use something between the 10
and 20-day moving average. If you want to focus predominantly on
the intermediate and long term trends, you would want to use
between a 18- or 21-day moving average for the intermediate
trend. For the longer term trend you can use between a 40- or
50-day moving average. What you will have on your stock charts
are two smoothed moving averages: one representing the
intermediate trend and the other representing the longer term
trend. We often use the 10-day and the 20-day moving averages.
You can use just one or the other but using both will help you
refine your buying and selling even more. One rule of thumb in
determining whether an uptrend exists is the following: when the
10-day moving average is above the 50-day moving average, and
both lines are rising, then an uptrend is in place. A powerful
uptrend is in place. A trend in motion tends to stay in motion.
Conversely, if the 10- is below the 50-day moving average and
both lines are falling, then a downtrend is in place. Buying
calls in hopes of a trend reversal would be foolish. All phases
of trend point lower. Picking market bottoms is dangerous!
Remember, when both phases of trend are in sync it gives us the
highest probability that the current trend will stay in place.
Don't fight or buck the trend. The trend is your friend! If you
stick with this simple rule of thumb it will keep you out of
trouble and also help you identify those stocks exhibiting the
strongest trends. Buying stock and/or calls in downtrends or
selling stock short/buying puts in uptrends is not a prudent
thing to do. This is like stepping in front of a runaway train.
Let the market tell you where it is going. There's no reason to
guess.
It should be pointed out that moving averages work great in a
trending environment, either up or down. They are useless when
stocks are in trading ranges. As you can see, it becomes
impossible to determine where prices are headed.
So there you have it... the key to knowing when a stock is in an
uptrend or downtrend. Suffice to say, the information is
priceless! Begin using it immediately and you're stock selection
will improve dramatically! You may wish to try AskResearch.com
for seeing and selecting moving averages.
About the author:
For more FREE trading tips, enter your email address at:
http://lb.bcentral.com/ex/manage/subscriberprefs?customerid=12826
|
