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Trader Q&A: Evaluate Stocks with Moving Averages

Experts discuss how you can use moving averages to evaluate individual stocks as well as potential pitfalls of relying too heavily on them.

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[John] Okay, great. So our next question comes from [Ted] in Illinois. "How do I use moving averages?" Okay.

[Kevin] Well, Ted, honestly, you know, moving averages can tell you a lot about what you're up to with an individual stock. But I want to caution you because, as with indicator, any oscillator you might consider using in a technical approach to the charts or to the market, nothing is ideal for every stock you look at. So you know, some securities really work with within moving averages, 20-day, 50-day, or 200-day moving averages. But, you know, the first thing I would say is to evaluate that on a stock-to-stock basis. I think you can take a snapshot in time, maybe a one or two-year period, looking at some standard moving average levels and see if the stock actually reflects that it relies on those. You know, if you find that it retreats to it's 50-day consistently, sits on it for a day to a couple of weeks, and then moves off of it, well, then you're finding something out about that stock. You've done a little bit of homework. You've learned something. But when you take that same thought process to the next security, if you're not seeing it, don't be married to the concept or to the idea. So what I would say is, Ted, give us a call. Let's have a chat about what you want to use the moving averages for. You can use them for buy signals. You can use them for sell signals. They are there. But I just caution against using them as a blanket approach because each stock seems to work differently with many different indicators.

[John] Yeah, what I would add to that, Kevin, is what we teach you in our technical analysis for traders class is exactly that, how to use your moving averages, how they're constructed. For a simple moving average, just to give you a little snippet, let's say it's a 20-day simple moving average, it is just simply taking the average of the closing prices of the last 20 days. So for those that use moving averages for signals for buying or selling, if current price is above the average price of the last 20 days or the 20 day moving average, then they consider that a bullish signal. And vice versa if it's below, it's considered a bearish signal. You can also use those as support. And Kevin mentioned three of the most popular moving averages, the 20-day, the 50-day, and the 200-day. So those are widely followed. You know, if you watch CNBC, you'll hear them mentioned also on CNBC. But to learn more, sign up for one of our seminars, search for one in your local area, or take our live online seminar, technical analysis for traders.

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Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Covered calls provide downside protection only to the extent of the premium received and limit upside potential to the strike price plus premium received. With long options, investors may lose 100% of funds invested. Multiple-leg options strategies will involve multiple commissions. Please read the Options Disclosure Document titled Characteristics and Risks of Standardized Options

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