1. Moving Averages (MA)
A moving average is a tool that helps smooth out price data to show the overall direction of a stock or market trend. It takes the average of the prices over a certain period of time, making it easier to see if prices are going up, down, or staying the same.
Types of Moving Averages:
Simple Moving Average (SMA):
The SMA is calculated by adding up the prices of a stock over a specific time period (like 50 days or 200 days) and dividing by that number of days.
Example: A 50-day SMA adds up the closing prices of the last 50 days and divides by 50 to get the average.
How to use it:
If the stock price is above the SMA, it’s a sign that the stock might be in an uptrend (going up).
If the stock price is below the SMA, it might be in a downtrend (going down).
Exponential Moving Average (EMA):
The EMA is similar to the SMA but gives more importance to the most recent prices, so it reacts faster to price changes.
How to use it:
EMAs are more responsive to recent price movements, making them better for spotting short-term trends.
2. Relative Strength Index (RSI)
The Relative Strength Index (RSI) is a tool that tells you if a stock is “overbought” (too expensive) or “oversold” (too cheap). The RSI gives a value between 0 and 100.
Overbought (above 70): If the RSI is above 70, it means the stock might have gone up too much too quickly, and it could fall soon (sell signal).
Oversold (below 30): If the RSI is below 30, it means the stock might have fallen too much, and it could go up soon (buy signal).
How to use it:
Look for RSI values above 70 to consider selling, and values below 30 to consider buying.
3. Moving Average Convergence Divergence (MACD)
The MACD is a tool that compares two moving averages (usually a 12-day EMA and a 26-day EMA) to show whether a stock is gaining or losing momentum. It helps you understand when a trend might be changing.
MACD Line: This is the difference between the 12-day EMA and the 26-day EMA.
Signal Line: A 9-day EMA of the MACD line. It helps confirm buy and sell signals.
How to use it:
Buy signal: When the MACD line crosses above the signal line, it’s a sign that the stock may start going up.
Sell signal: When the MACD line crosses below the signal line, it’s a sign that the stock may start going down.
4. Bollinger Bands
Bollinger Bands consist of three lines:
Middle Band: A simple moving average (SMA).
Upper Band: The middle band plus two standard deviations.
Lower Band: The middle band minus two standard deviations.
These bands expand and contract based on price volatility (how much prices are moving).
How to use it:
Overbought: When the price is near the upper band, the stock might be overbought (too expensive), and it could drop.
Oversold: When the price is near the lower band, the stock might be oversold (too cheap), and it could rise.
Squeeze: When the bands are very close together, it usually means a big price move is coming soon.
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