Q- Question from one of our students: "You mentioned that [moving averages act as magnets and] prices get attracted and tend to move close to simple or exponential moving averages. So if for example the chart is going up and the price is going down but is still above the moving average line, how low do you think it will get before it settles and then starts to go up? is there a way to predict it, or we just wait and see how traders make their individual decisions?".
A- Very good question.
Moving averages are a very important indicator, worth learning. Please check out these two video where I show what moving averages are and how to use them.
Unfortunately, there is no way to predict what price will do next. However, we can gather as much information as possible to stack the odds in our favor.
In other words you want to have to increase the probability of success by recognizing key elements.
Here is an example. Please take a look at the image below.
TRUE (True Car, Inc.):
- Stock is in an uptrend
- Hammer pattern formed right at support
- Price is breaking out of the triangle pattern
- 50 SMA (Simple Moving Day Average) is holding
- OBV (On Balance Volume) is moving up, trending above the blue line
The more elements you can put together to confirm your assessment, the more confident and less emotional you will feel about your trading decision, the better and more successful will be your trading plan.
Good trading!
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