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Technical Analysis

Posted by Yogesh Agrawal on Friday, 4 April, 2008

Moving Average levels are interpreted as support in a rising market, or resistance in a falling market.

All moving averages are lagging indicators and will always be “behind” the price. If the price of a stock is trending down, the simple moving average, which is based on the previous 10 days of data, remains above the price. If the price were rising, the SMA would most likely be below.

Because moving averages are lagging indicators, they fit in the category of trend following indicators. When prices are trending, moving averages work well. However, when prices are not trending, moving averages can give misleading signals.

When to Use

Because moving averages follow the trend, they work best when a security is trending and are ineffective when a security moves in a trading range. With this in mind, investors and traders should first identify securities that display some trending characteristics before attempting to analyze with moving averages. This process does not have to be a scientific examination. Usually, a simple visual assessment of the price chart can determine if a security exhibits characteristics of trend.

In its simplest form, a security’s price can be doing only one of three things: trending up, trending down or trading in a range. An uptrend is established when a security forms a series of higher highs and higher lows. A downtrend is established when a security forms a series of lower lows and lower highs. A trading range is established if a security cannot establish an uptrend or downtrend. If a security is in a trading range, an uptrend is started when the upper boundary of the range is broken and a downtrend begins when the lower boundary is broken.

Ref:
WikiPedia
Stock Charts.com

P.S. In finance training, a health insurance matters a lot more than a car insurance and to avoid loans, one should use his business cards with caution.

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