Summer school technical indicators

There are many technical analysts’ uses as a chart reading.  Some investors or traders uses a combination of TA and FA to time when to buy or sell a stock.

Today let discuss a popular but simple technical analysis tool – The moving average to assists us to help to when to enter the stock.

The moving average (MA) is a simple technical analysis tool that smooths out stocks price information by creating a constantly updated average price on the stock chart. . The average is taken over a specific period of time, like 5 days, 10 days, 20 days etc.

For further understanding the moving average, one may look up at moo moo trading course and look up for moving average. They have pretty good write up how to use apply the technique and you get to learn for FREE.

Some investors using the MA as a trend following method. One might heard before- The Trend is your friend in trading community.  Meaning, don’t go against the trend when purchasing /selling a stock. You have lesser possibilities of wining for the trade.

So in here, we can use MA to determine if the stock is uptrend or down trend before one decide if to consider more in-depth studying of the stock before purchase/sell the stock

Let look at one example for case study. It is not a recommendation for buy or sell. Just explore how one can use the MA for buy or selling stock using MA as trending guide .

Let look at BABA. See chart below
Oct 27 2020 BABA hit a high of 319.32. (Orange arrow) after that, the stock fell . On Nov 18, it hit a low of 252.55, (green arrow) falling 20% from high before it rebound. 

A lot of new investors saw the price has rebound from bottom on 18 Nov, and started to buy as they are buying at a good company at a cheaper price for investment.

However, the rebound was weak, and peak on 27 Nov at 278.92 (blue arrow). After that, the stock price keep falling down to 211.23 on 24 Dec (yellow arrow). Falling another 24%, if one did not get out.

Is there a way to avoid loses?? 

Let explore here

IF we applied the 20 days MA on to the chart and we notice that the trend of the stock and MA is pointing  downward, ,  and  if one to buy on 18 Nov 2020 , it  is trading  against  the trend , the possibilities of winning trade is less. So one might not take the trade. The trend is your friend.

Therefore the MA in here caution us and  highlight to us that we are trading against the trend, and  more consideration is needed before buying the stock.  It could help to avoid 24% loses.

Let look again at the same chart.  On 28 Jan 2021. The price recover to 260 (white arrow) and also notice that the MA also started to point upward.  It indicate the trend could be changing, and if one base on these information and take a position, and 24 Feb 2021, (250 – white arrow) the stock price took at turn and move lower and the MA begin to point down, It suggest that the trend could be changing and it about time to take a look at the trade if it need to get out.

In here, we could have taken a loss of about 3.8%.  if we were to hold till today the loses will be greater as the trend is keep going down

So does this meant that this MA is to prevent loses, the answer is a yes and no.  It depend on the position that one take , Assume if one take a position short on 18 Nov 2020 , then he is in huge profit by now.

So it this a magic to profit?

There are lot of technical analyst methods out there to use.  One method might work on one person might not work on other, ...  One has to find the one that suitable to  your personality and risk appetite

Each methods has it pros can cons, and one need to improve by learning more methods to improve oneself and find its own trading methods that suite you.

There are free reading materials from MOOMOO course and it also help one save up on training course fees and use for investing into stocks.

In short :  Objective is to win big and loose small and manage risk well

Good luck