Basic Methods to Determine the Timing of Stock Buying and Selling (2) - Analysis with Moving Averages
In the previous post, I introduced various basic methodologies to determine the timing for buying and selling stocks. Among them, I would like to provide more detailed examples of the two indicators I often refer to.
To jog your memory, I primarily use the Moving Averages and the Relative Strength Index (RSI).
Moving Averages: Moving Averages calculate the average price of a stock, helping to identify its trend. If the moving average is rising, it's interpreted as an upward trend, and if it's falling, it's seen as a downward trend.
Relative Strength Index (RSI): RSI is an indicator to determine if a stock is in an overbought or oversold state. Typically, an RSI above 70 indicates an overbought condition, and below 30 indicates an oversold condition.
You can easily see the moving average on any stock-related website, so there's no need for calculations. Just by the moving average, you can somewhat consider the timing for buying and selling.
Simple Moving Average (SMA): SMA is the average stock price over a specific period. If the stock price rises above the SMA, it's a signal of an upward trend, and you might consider buying. Conversely, if the stock price falls below the SMA, it's a signal of a downward trend, and you might consider selling.
Exponential Moving Average (EMA): EMA is a moving average that gives more weight to recent data. It reflects price changes more quickly, so it can detect trend reversals faster than SMA. The method to determine buying and selling times using EMA is the same as with SMA.
Moving Average Crossover: This method observes the crossover of short-term and long-term moving averages. Typically, when a short-term moving average (e.g., 50 days) crosses above a long-term moving average (e.g., 200 days), it's interpreted as a buying signal. The opposite is seen as a selling signal.
However, just looking at the moving average makes it hard to determine if it's overbought or oversold. Therefore, I look at both the moving average and the RSI. The timing for buying and selling can vary somewhat when considering both the moving average and the RSI compared to just looking at the moving average alone.