Technical Tools

By Author: Vickey Nhep
Total Articles: 6
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The stock market is notoriously difficult to predict, even experts struggle from time to time. Whether you trade directly on the markets or through a spread betting platform, it''s important that you know how to analyse the information in front of you. One method of doing this is to employ moving averages.

Moving averages are a lagging indicator, this means that they tell you where the market has been, and you have to interpret how to take them forwards. The first element of a moving average is to create the average first, so you would take the previous x number of prices (this amount can vary depending on whether you want a really accurate price, or something a little more indicative) and average all those prices out.

The reason that average moves is because it constantly updates itself. So, if you wanted closing prices for the last ten days, you would take all the prices and average them to draw up your figure. However, at the end of the next day, you''d take only the last ten days, discounting the first closing price, and thus you''d have a different figure.

These figures are then used to create a graph, ...
... much like the stock market in shape, but with certain fundamental differences and it''s these differences that inform your trades. If, for example, the current price is significantly higher than the moving average line but the two are converging, it shows that the market was overvalued but is coming back down to a reasonable price.

The kind of average I''ve touched on so far is easy to work out, it''s called a simple moving average (SMA) because it assumes that every piece of data is equally relevant. Many experts argue that this is artificial, however, because with stock markets, the most recent data is the most relevant and should be weighted accordingly.

To that end the Exponential Moving Average (EMA) was created. The EMA works out an average price but weighs the most recent data more heavily than the older data. This means that the EMA is very reactive to the prices of the market, and therefore many traders prefer to use it.

Once you''ve understood what a moving average is, it''s possible to trade with them. One simple technique is to buy when the market price moves above the moving average and to sell when it looks like passing below. There are also techniques involving the combination of moving averages to work out when the market is weakening or strengthening.

Thankfully, you won''t have to calculate these figures yourself, many companies offer EMAs and SMAs as part of the trading platform. They also offer masses of resources to their traders, some of which teach them to trade and the fundamentals of technical analysis. Good traders have a whole range of tools and methods of analysis at their disposal, so if you want to make the most of your money, it''s a good idea to take some time and work your way through these resources before you start risking your hard-earned cash. Vickey Nhep is a market trader and financial expert with 10 years experience of the stock market. They recommend CMC Markets for CFD trading and spread betting.