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If you pull a rubber band too far, too fast, what happens?
It snaps back, right? The same thing happens with stocks, indexes, and currencies. If they’re pulled too far in one direction, eventually they’ll snap back and revert to back to the mean. In fact, we see it happen all the time.
When it comes to technical analysis, moving averages are essential.
For example, for more than 20 years, I’ve relied on two specifically – the 50-day and the 200-day simply moving average. Not only am I looking for crossovers for golden and death crosses, I want to see if a stock is holding its own above them.
Way back in the 1700s, Munehia Homma first created candlestick charts for rice trade.
Oftentimes, he would record the opening day’s price of rice, the low and the close.
Over time, he’d begin to see price patterns in his recordings, mapping out repetitive signals in the price bars.
Every time you trade a stock, it’s essential that you understand the psychology of the buyers and seller. If not, you begin to run the risk of losing money.
That’s the last thing any of us want to do.