Finding Profitable Stock Trades - Using Moving Averages


by Dave Wooding - Date: 2006-12-05 - Word Count: 357 Share This!

You can filter the universe of stocks worth trading by using moving averages.

Moving averages are a lagging indicator of market activity. You calculate a moving average by adding up the closing prices of each price bar and dividing the number of price bars. For the next period you drop the oldest data and repeat the calculation. Moving averages are used as an indicator of the underlying trend instead of as an entry signal.

One way of finding the strongest stocks for buying is to check for stock price above three different moving averages. Use a short, medium, and long term moving average. As an example, on the daily time frame, use the 10 day, 50 day, and 200 day moving averages. There are nothing special about those numbers, you can choose numbers that you consider appropriate for each time frame. Just be sure to consistently use those same numbers for calculating the moving averages.

If you are an end of day trader looking for a stock to trade on the long side, then look for the following characteristics in a stock:

1) Today's closing price is greater than all three moving averages - the short, medium, and long term moving averages.

2) All three moving averages should be trending up - today's moving average is greater than yesterday's moving average.

4) The short time frame moving average is greater than the medium term moving average. The medium term moving average is greater than the long term moving average.

Using these three criteria effectively limits the number of stocks to trade down to a reasonable number that you can filter further. For instance, requiring that today's price close is greater than yesterday's closing price or today's price range needs to be greater than yesterday's price range will further reduce the number of stocks.

Think about this, if you are a trader looking to make money (and isn't that what trading is all about), doesn't it make sense to only consider the strongest - or weakest if you are selling short?

Using moving averages to filter your list of possible stocks to trade is one way to keep your trades limited to the stocks most likely to hand you profits.


Related Tags: trading, stock trades, profitable, moving averages

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