Hey mooers , today let's learn how to identify stock market trends using moving averages to help add context, support decision making, and complement other forms of analysis.
Technical analysis of stocks borrows from the law of inertia to understand and describe the relationships between a stock price, buying and selling of the stock, and its motion. In describing motion, investors borrow another physics term, "momentum," which, as in physics, is the quantity of motion. The "forces" acting on a stock are buying and selling. And the "motion" of a stock is usually called a trend.
Trends can form in three directions: up, down, or sideways. These trends, or ways of describing a stock's motion, are among the technical analysis basics.
Let's take Apple's chart as an example :
Trend Analysis for Investors
As opposed to traders, investors typically hold investments for long periods of time — months or several years. So when it comes to applying trend analysis to investing, it's important to use a chart and time frame that aligns with investing.
Here's how these two moving averages can help identify trends. When the 5-day moving average is greater than the 20-day moving average, the AAPL is in an uptrend. When the 5-day is less than the 20-day moving average, the AAPL is in a downtrend.
The idea is to maximize profits when the AAPL is in an uptrend. But when the AAPL is in a downtrend, the idea is to limit losses.
Identifying trends using technical analysis is not an exact science; it has flaws, and it's not a standalone investing strategy. But technical analysis basics such as trend analysis can help add context, support your decision making, and complement other forms of analysis like fundamental, macroeconomic, and psychological.