Friday, April 10, 2015

Moving Average

There are still many so call "trader" still do not understand why we need to plot Moving Average line in a chat. That come to my surprise when I have a conversation with a client. 

When is the time we use Moving Average? To answer the question, first we need to understand what's moving average represent. In the older day, if Mr A is a rich guy, he can buy a lot of X stock then record down the price everyday. Say the first day, he buy a lot at $1, second day buy at $1.10, third day buy at $0.95.... After buying for 10 days,  he can sum up all the money and divide by 10 lot to get the 10 day average price. Then plot a dot to a chat to represent this, after few days doing the same thing, he can draw a line to connect all these dots.... and this line we call it "10 days moving average". 

Today, we can use computer to help us plot the different type of "moving average" line, it can be 10 days or 5 days, with just a click, all the line would be displayed on the screen. After plot the line, we can know, Mr A's average price for X stock. If current stock price is above Mr A's average price, we can say the stock is on the uptrend and he is making profit. (be it paper gain or real gain, doesn't matter) If the current stock price is below Mr A's average price, we can tell that he is losing the money. 

So, now the question come, should we buy X stock when Mr A making profit (when a sock is up trend) or when Mr A making loses (when the stock is down trend)? 

If Mr A keep on buying for the last 10 weeks, we only need to plot a chat of 10 weeks moving average to know his average price. In this case, the smart way to buy this stock is when Mr A start to make money (the break even point). 

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