Technical Stock-Picking: Get to Know the Moving Average

Your Moving Average Assignment

In "Technical Stock-Picking: How to Trade Off of a Chart," you can see how to pick "rocket stocks" based on chart reading, without the help of moving average statistics. This time, look for stocks ready to rocket because they were trading below their 50-day moving average line and now trade above it.

Step 1. On Stockpickr , create a portfolio called "Rocket Stocks By 50 Day Moving Average Analysis: [Your Stockpickr Username]." (To create a portfolio on Stockpickr, you'll need to first log in. If you're currently not a Stockpickr member, you can register at www.stockpickr.com/register .)

Step 2. Research the Stockpickr portfolio database to find five companies that have recently crossed from below their 50-day moving average to above it. Using your favorite charting software, such as Yahoo! Finance Charts, plot the stock price and its 50-day moving average.

Since some institutional "elephants" base their buy decision on the 50-day moving average, and this is considered a bullish bellwether, you may find reports in the financial press on this.

Remember, you're playing technician, not really worrying about the fundamentals. The idea is that if more money is being bet that the price will go up than that it will go down, the price will react to this. Check out volume as well -- a move on heavier than average volume makes the buying signal even stronger.

Document your reasoning in the "Reason?" box. Enter the high, low, close and volume for that day as well.

Step 3. After the close of the next trading day, enter the high, low, close, and volume in the "Reason?" box. Is the high price on high volume trend continuing or is it time to sell?

Step 4. Repeat Step 3 for the next four trading days, developing a weekly history of the stock's price and volume performance.

Step 5. At the end of the week, compare your results with last week. Do you feel more confident because you have moving averages to support your decisions?

Professionals from long term investors to day traders use moving average lines on their charts. Long term investors use the 200-day moving average and 50-day moving average lines to find optimal buy and sell points. Day traders plot moving average trends in increments as small as one minute, looking for price blips on an intraday chart.

As you gain experience in chart reading, you're not simply staring at a wavy line but instead, you're basing your buy or sell decision on solid patterns.

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