Mean Reversion The Moving Average Indicator. Part III
In my two previous articles on this topic, I’ve detailed how traders and investors use one of the most common components of technical analysis, the simple moving average. A moving average is a running average of the closing price of a stock over x number of time periods. The two most widely used averages are the 50day and 200day moving averages. As I’ve said, moving averages are not just used by specially trained market technicians. Today even financial analysts with Harvard MBA’s will refer to the 50day and the 200day moving averages as frequently as they do to P/E ratios and earnings growth rates.
In the previous articles, I talked about how moving averages help us get a good “read” of a stock’s price chart. We’ve seen how to use moving averages to determine the dominant trend of a stock or index, as well as the ideal points at which to enter or exit that trend. Today I want to bring my discussion of moving averages to a close by talking about one more way to use moving averages. This is, in fact, one of the most consistently profitable technical trading strategies I use. In this strategy we are stressing the idea that certain moving averages – particularly the “big two”, the 50day and 200day averages – act as “magnets” for the price of a stock or index whenever it moves too far away from the averages.
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