When investing in CFDs, you try to predict in all possible ways what the prices will do in the future. You can earn money through movements on the stock exchange with stocks. It does not matter whether the price goes up or down. Various indicators can be used to make the correct predictions. An example is the moving average as an indicator for predicting movements in the price.
What is the moving average?
The moving average is an indicator where you add up the prices of a period and then divide it by the same period. This allows you to calculate the average rate over a certain period. The moving average can then be used as an indicator to predict whether a price will rise or fall.
For example, if the current stock price is far below the average of the past 30 days, this may indicate a temporary dip. It is possible that the price of the stock will rise again in the foreseeable future to the average rate that you have calculated with the moving average. Conversely, current rate that is a too high based on the average may be an indication of a future decline.
Moving average at the broker Plus500 (purple line)
Simple moving average
In the investment world there are different ways to calculate the moving average. The easiest way is to calculate the simple moving average. This is also referred to as Moving Average (MA). You calculate this average in the way described above. It is a simple summation that is later divided.
Exponential moving average
Changes in the price of a stock can be caused by certain events. This could for example be a news item, prognosis or gossip. When calculating a moving average, you can also take this into account by giving weight to certain increases or decreases. This is referred to as Exponential Moving Average, and the abbreviation EMA is also used.
Weighted moving average
The changes that are taking place with the price of a stock at the moment are more important than the changes of a number of days or even months ago. The current changes have the most effect on the price you are trying to predict. To weight the moving average you calculate the indicator in such a way that changes in the past are weighted less heavily. This is known as the Weighted Moving Average or WMA.
Setting the indicator on your account
Now that you know how you can use a moving average as an indicator to predict changes in prices, you naturally want to put this new knowledge into practice. You do not have to immediately grab a calculator and pen and paper from the cupboard. Most brokers of CFDs, such as Plus500, allow you to simply set this indicator.
When you are logged in to your account, you can select the three variants of moving average as indicators. You can then easily calculate the averages for the stocks for the periods you set here. Then, of course, the idea is that you then take action on the information that the indicators indicate. It is a good way to make informed decisions when investing in stocks.