The more you know about an investment position, whether you own it or are considering it, the better prepared you are to make smart decisions… but that information is limited without the context of the bigger picture.
A real-time quote is a snapshot of where the stock is now, but how does that compare to the stock’s performance over the past few days… or weeks… or months? Has the general trend been looking up… or steadily falling?
The volatility and fluctuations of the market can often time make this hard to figure out with price movements bouncing all over the place. You need to cut out the distractions and the extraneous information and get to the heart of the situation… and that’s where moving averages can be a big help.
For those of you who are new traders and just learning the language, a moving average is the average closing price of a stock over a specified period of time. The value of moving averages is that they take out the clutter of the minor gains and losses that every stock experiences on a daily basis and lets you see the overall direction or trend.
The time frames for moving averages can range from short-term snapshots (5, 10 or 15 days) to long-term overviews of 100 days… or more. The time frame you use will depend on your trading style – short-term traders generally prefer shorter time frames, while investors often prefer long-term averages – and other relevant information that relates to each company and stock.
But while moving averages are useful to help you get an idea of a stock’s general trend, they can also be valuable indicators of a stock’s current performance.
TradeStops Complete members have the ability to track and set a large number of different alerts in addition to trailing stops. Included in these are two types of moving average alerts: above/below moving average alerts, and moving average crosses alerts.
Above/below alerts signal when a position’s price reaches a set percentage above or below a specified moving average (e.g., when a stock closes 10% above or below the 15-day moving average of the closing price). This type of alert considers a single moving average and uses it as a reference point for the stock’s closing price each day…if the 15-day moving average price is $100, then you will be alerted if the stock closes at $110 or at $90.
Moving average crosses alerts, however, monitor two different moving average time frames for one position, and let you know when these two trends “cross” (i.e., when the 15-day moving average climbs to 10% above the 50-day moving average).
These alerts can let you know when indicators of specific trends or possible trend changes have been triggered. The moving average crosses alert can tell you, for instance, that a 50 day moving average has crossed below the 200 day moving average, which is often a bearish (downward trending) signal.
It’s important to keep in mind that moving averages are based on past trends, not predictions.
Because of this, there will be some delay or “lag” that increases with longer time frames – in other words, a 200-day moving average will be slow to indicate a sudden sharp up-tick or downturn.
On the other hand, while a 5-day or 10-day moving average will still lag, it will also be impacted by any sudden moves more rapidly… but won’t always let you see the big picture.
That’s why using a moving average crosses indicator can be so effective: you get a view of the long-term trend, as well as a more change-sensitive short-term trend. And with a TradeStops Complete account, you can be alerted as soon as the moving averages you’ve chosen have crossed.
Since moving averages are a general indicator of past trends – and, as we just discussed, lag behind – they are not ideal for use as real-time indicators of when to buy or sell… for that purpose, trailing stops are a far more effective tool.
So then why use moving average alerts?
They are an excellent complementary tool to be used in conjunction with other alerts and indicators to help you be aware of the current status of all of your positions… especially when there is a significant development or a possible change in the market’s direction.
If the moving averages are increasing, you might be able to anticipate a bullish trend… while if they’re falling, this could be a bearish signal.
Advanced investors may also apply moving average information to their decision-making process on setting or adjusting the
percentage used in a position’s trailing stop.
All of this information – and so much more – is available to TradeStops Complete subscribers. With the many options for alerts available, you can be promptly notified when important changes occur. More choices, more alerts and a more “Complete” TradeStops” service.
Learn more today about the many benefits available to TradeStops Complete subscribers, and the new features and improvements that all users can access with TradeStops 2.0.