Day trading strategies: the complete guide with all the advanced tactics for stock and options trading strategies. Find here the tools you will need to invest in the forex market



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Moving Averages
Another tool used in technical analysis is the moving average. A moving
average is defined by the number of periods. So if we were using a chart


that is framed in terms of days, a 9-period moving average would be a 9-
day moving average. To plot points on the chart, the moving average would
take the 9 previous days and average them. This helps eliminate noise from
the stock charts and can be useful in spotting trends.
This example shows how a moving average (the purple line) generates a
smooth curve for Apple, allowing us to focus more clearly on the trend in
price.
The real benefit comes from comparing moving averages with different
time periods. That’s because it indicates that buyers are moving into the
market more recently.
A simple moving average, one that simply calculates the average of the past
given number of days, is going to give equal weight to prices days ago and
prices more recently. This is an undesirable feature, and so traders prefer to
use exponential moving averages to get more accurate data. Exponential
moving averages weight the data, giving more weight to recent prices and
less weight to more distant prices. Here is the Apple chart with a 9-day
exponential moving average and a 20-day exponential moving average. The
20-day moving average is in red. Notice that when the 9-day moving
average crosses above the 20-day moving average, the price enters an
upward trend. Conversely, when the 9-day moving average passes below
the 20-day moving average, the price enters a downward trend.


We also see signals in the candlesticks on the chart as well. Notice that at
the low point in June, a larger green candlestick follows the red candlestick.
That is a bearish day of selling Apple off was followed by a bullish day of
rising prices. When a candlestick of one type is larger than the previous
candlestick of the opposite type, we say that it engulfs the other candlestick.
Usually, this is a sign of a trend reversal.



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