Technical analysis - Is it important to use moving average when dealing in stock?

Moving averages are one of the most important tools available when evaluating financial information. Namely regarding to stock market it can by itself be a trading tool.

What is a Moving Average (also referred to as MA for short)? Well, it's a moving average because it normally has associated with itself a number, this number (in the stock market scenario) means the last x trading days. So basically if we have a MA10, this will be the average of the last 10 days.

Analysts normally use 3 types of MA one for short term, medium and long, the long term in stock markets is normally less than a year. The most frequently used by analysts is MA10 (short term), MA50 (medium) and MA150 or MA200 (long term). Their is no specific rule regarding the days involved in a MA, however each will give you a different perspective once you chart it.

Personally I use MA when I chart stock quotes and volumes. For the quotes I use 3 MA, one for the very short term MA10, it gives me an idea how the stock is doing at the moment facing the immediate past, so if a stock just crosses over its MA10 that means that the tendency may be to evolve favorable. I never use the MA10 alone as an indicator to buy or to sell, and when we deal with small caps, it can't be taken in consideration at all.

I also use the MA50 on the quotes, it gives me an idea as how we are today, regarding the past 2 months or so. My third MA indicator is the MA150, I consider this a long term, this MA150 gives me a long term perspective, actually I look at it's inclination to figure if it's positive or negative. A bullish stock will have a positive indication from it's MA150, that's the confirmation of the bullish sentiment. Anyhow, important things to look forward to is the crossover MA50 to MA150, normally it'll give you an idea how the stock is doing in general, it can be a good sign or a bad sign.

So regarding stock prices, it's important for you to define 3 MA, colour each one with its own colour so you can easily identify it, when you chart stocks and indexes.

I also use the MA on volumes, in my opinion it's very important when you decide to buy a stock, I like buying stocks that have increase in volume, it gives me a good buying signal when accompanied by other indicators. When dealing with volumes I use only 2 MA, one MA10 short term, gives me the evolution during the last 10 days, and a MA50. So when the MA10 is above the MA50 gives me an idea that the volumes are up facing the average of the last 50 days. That's excellent information when buying or selling stock. For example, if a stock rises in price but the volumes are very low that is not a good signal, in fact it can be a false signal.