Feature Usage Guide
3.5. Price Chart
Investing in fundamentally strong company gives great gains, yes, but is there a tool or a technique by which you can maximise these gains?
With this thought in mind, we came up with the Price Chart. This Chart is a tool which helps you time your investment properly. It is a place where the technical stock analysis meets the fundamental stock analysis.
The Price Chart:
The Price Chart is an integral tool of technical stock analysis which works on the concept of Moving Averages (MA). A moving average is a smoothened average of the movement of the stock price over a period of time. What it does is that it averages out the daily movement and creates one line which shows whether there is an upward or downward movement in the price over the long term. Old prices are dropped as new prices become available.
Moving averages can be calculated over any duration of time. We calculate the moving averages over 13 days, 26 days, 50 days and 200 days. If you wish to see the short term movement in the stock price, you take the 13 or 26 days moving average. If you wish to see the long term movement in the stock price, you take the 50 days or 200 days moving average.
To make it even easier for you to see which way the stock price is moving, you can compare two or more of the moving average lines in the Price Chart. For instance, if a shorter term moving average is cutting the longer term average from below, or is consistently above the longer term moving average, it means that there is an upward movement in the price of the stock. Conversely, if the shorter term moving average line cuts the longer term moving average line from above, or is consistently below the longer term moving average line, it indicates a downward movement in the price of the stock.
MoneyWorks4me provides four kinds of moving average:
|13-day moving average||26-day moving average||50-day moving average||200-day moving average|
As a value investor we can use the graph at the time of buy and sell to gain from the short term variations in share price. This can be achieved by using the graph as follows:
- For BUY signal the share price must be at or below discount price and the share price line must cut the moving average line from below.
- For SELL signal the share price must be at or above MRP and the share price line must cut the moving average line from above.
- If the share price is in between MRP and Discount Price, then we should not buy or sell the shares of the company, i.e. we should ignore the buy and sell signals of the moving average graph.
To simplify this, Moneyworks4me generates the following signals based on the movement of the stock price and the moving averages. This way you look up a stock on the Moneyworks4me Decision Maker, you will get the following signals.
While using the Price Chart, it is essential to keep in mind that no tool can time the market with 100% accuracy. But it is a more scientific way to understand the price trends and make investment decisions accordingly, to get the best returns.
We must also keep in mind that moving average, as a concept, produces late signals. And the longer the moving average period, the later will be the lag in the signal. Also, these signals work better when a good trend takes hold. However, using moving average may not be fruitful when market is witnessing sideways movements.