Moving averages are the most widely used indicators for trading stocks, because they reveal when a stock is trending either in a given direction or in a trading range. By understanding how to use moving averages to trade stocks, you will know when to use a trend-based trading strategy and when to use a trading-range strategy.

Moving Averages Defined

Moving averages are price indicators that offer visual representations of what a stock's price has done in a certain time period. For example, a 50-day simple moving average, or SMA, is a visual representation of the average price a stock has closed at over the last 50 trading days. By knowing what a stock's price behavior has been in the past, you'll have an idea of what it will do in the future.

Trending Days

Trending stocks can be spotted using moving averages because the moving averages will tend to slope upward. For example, if you place a 10-day, 20-day, and 30-day SMA on a price chart and they are all sloping upward in consecutive order while price is trading above them as well, it signals that you should be using a bullish trend-trading strategy. If those same moving averages all slope downward, with the 10-day SMA trading below the 20-day SMA and both trading below the 30-day SMA with price trading below all of them, then the moving averages are showing you should use a bearish trend-trading strategy.

Trading Ranges

Moving averages can also reveal when a stock is in a constricted trading range between two price points. When the averages are seen to be running flat or crisscrossing through each other and you can observe that price is trading between two price levels, then it tells you that you should be trading off of support and resistance. At such times, you should avoid committing to any one direction until resumption of a trend, which will be reflected in the moving averages as detailed earlier.

Source:

TradingMarkets.com: Using Moving Averages to Gain a Trading Edge

Swing-Trade-Stocks.com: How to Use Moving Averages