There are hundreds of different technical indicators out there to analyze stock charts. However moving averages are probably the most widely used technical indicator by investors and traders due to their ease of use.
There are several different types of moving averages - exponential, simple, smoothing and weighted, just to name a few. I like to keep things as simple as possible, so based on the KISS theory (Keep It Simple Stupid), I use simple moving averages on my charts.
The definition of a simple moving average is "A simple, or arithmetic, moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react."
Let's review some color coordinating techniques that I use on my charts when I review moving averages.
Moving Averages Legend
The moving averages and the colors I illustrate on Micron's chart below are the same colors that I display on every stock chart here at Trendy Stock Charts. For example, the 20 Day Moving Average is always the purple line on my stock charts.
Being consistent with chart markings makes it easier for everyone to understand, including myself, especially since I look at numerous charts for several different stocks every day.
As illustrated above, I typically display the following moving averages in the colors shown on each stock chart when I am analyzing it from a moving average perspective:
- 5 Day Moving Average
- 10 Day Moving Average
- 20 Day Moving Average
- 50 Day Moving Average
- 200 Day Moving Average
While different investors prefer to look at only specific moving averages (like a 5 Day or a 20 Day Moving Average), I tend to overlay several different moving average lengths at the same time as I like to see all trends taking place rather than just a specific few.
Also, the moving average tool becomes even more powerful when it is combined with other methods of technical analysis.
There are even specific trading and investing strategies for different moving averages. Are you familiar with some of the trading strategies using moving averages? Applying some of these relatively simple strategies can dramatically increase the profitability of your trades.
If you are not yet a Trendy Stock Charts member, what are you waiting for?