Do you use moving averages in your trading?
If not, you are missing one of the very best indicators. Moving averages are powerful because they give traders a view of the market’s or stock’s trend in the moment. Including its volatility, along with possible support and resistance lines. Moving averages are on trader’s charts and used as buy and sell points. It is very interesting to lay a 50 day and 200 day moving average onto a chart for the past year. You will begin to see patterns develop. Bounce off the 50 day, a last chance for support at the 200 day etc. Each stock and ETF has different key moving averages and different reactions to them. It can help your trading to know the key moving averages for what you are trading, and understand the reactions they have to create support and resistance. They give clues as to where the buyers and sellers are waiting.
Ten things traders need to know about moving averages.
1. The 20-day moving average commonly marks the shorter term trend, the 50-day moving average the intermediate trend, and the 200-day moving average the long-term trend of the market. The SPY is generally the best tracking ETF for the market in general.
2. In sharply trending markets the 5 day exponential moving average and 10 day simple moving averages can give meaningful points for entries and exits to help manage your position in extended trends when the longer term moving averages are too far away. Short term moving averages can also be used as pivot points for very short term trading and even day trading.
3. Exponential Moving Averages apply more weight to recent price change, while Simple Moving Averages view each data point equally.
4. SMAs let you see where other traders, both big and small are buying and selling. The meaning of moving averages as support and resistance points on charts rely more on how other traders are reacting. When they are touched by price and can over ride other signals from a trend, technical analysis, or chart patterns in the stock.
5. Where the price on the chart is in relation to the 200-day moving average is determined by long-term investor and trader psychology. Bulls like to stay above the 200-day moving average, while bears sell short below it. Bears usually win and sell into rallies below this line, and bulls buy into pull backs above it. This line is one of the biggest signals in the market telling you which side to be on. Bull above, Bear below.
6. When the 50-day moving average pierces the 200-day moving average in either direction, it supposedly predicts a substantial shift in buying and selling behavior. The 50-day moving average rising above the 200-day moving average is called a Golden Cross, while the bearish piercing of the 200 day with the 50 day is called a Death Cross.
7. A great second chance entry on a hot stock is a retaking or bouncing off a 50 day moving average for the specific stocks chart. Many institutional buyers are waiting at the 50 day SMA to add to their long term positions.
8. Getting a monster stock like an $AAPL or a $GOOG at the 200 day is like a gift from the trading Gods. However if the 200 day is lost it is very dangerous and could begin a fall with no net, the loss of this level was the time to short the old leaders like $RIMM and $NFLX that had death spiral plunges.
9. Some traders use systems that give buy and sell signals when a shorter term moving average crosses over a longer one. Legendary trend trading pioneer Richard Donchian used a five and twenty day moving average cross over system for buy and sell signals, and it worked!
10. Some traders watch for when a moving average begins to slope upwards or downwards and consider it as a signal of a trend beginning, continuing, or changing.
Each trader must decide how to incorporate moving averages into their own system and time frame. These are very powerful indicators when used correctly.