Investors often use a simple moving average calculation and graph to time buying and selling in the stock market. A simple moving average adds up the closing share price or market value for the number of days selected, and divides it by the number of days. This point is plotted on the stock chart. At the end of the next day, the new day's closing price is added and the oldest price is dropped, while a new point is calculated and plotted. A moving average smooths out the daily price changes of the tracked stock or stock index.
1. Select a source for price charting to track your selected stock prices and the simple moving averages. Sources where you can find useable charts include major online financial websites, charting specialty websites, your online brokerage account and trading software.
2. Set up the chart using a daily time frame to show the daily price moves. Add a simple moving average line by selecting SMA from the list of available indicators. You will be asked to enter a period of time -- commonly used moving average periods are 50, 100 or 200 days.
3. Study the price charts using several different moving average periods until you find one that provides good signals when a price reversal has occurred. A reversal is indicated when the price of the stock is crossed by the moving average line.
4. Use the moving average crossover points as buy and sell signals. Buy when the stock price crosses from below to above the simple moving average line and sell when the price crosses back below the line.
- The simple moving average is a long-term trend indicator. It is best used to time selling stock to avoid a significant downturn in the market.
- Many investors combine two simple moving average lines. The technique requires a shorter time period, such as 20 days, with a longer time frame like 100 days. Prices crossing both simple moving average lines and then having the simple moving average lines cross is a strong indication of a developed price trend.
- Technical chart indicators use historical information to give traders and idea of where prices are heading. No one indicator will always give accurate predictions.
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