For example, finding a simple moving average of a 200-day period may result in a major lag. These multiple types attempt to solve the fact that the initial MA has some gaps and lags. There are several types of moving averages. At the time, people used to look at the moving average of the number of cases to see whether the trend was moving in the right direction or not. The concept of moving averages was seen widely during the Covid-19 pandemic. On the other hand, if the price moves below $4, it can be perceived as if it is getting undervalued. Therefore, if the price suddenly rises to $20, we can assume that the overall price is overvalued. For example, if the price of an asset has traded at $10, $12, $14, and $15 in a four-day period, then the average of this price is $12.75. You can even try swapping between the simple moving average and the exponential moving average, until you find the one you like the action of best.A moving average is an indicator that seeks to find the average price of an asset in a certain period of time. Some stocks respond better to using a different number of days for the averaging. You can experiment with the time periods on each of these, to see what the effect is on the signals. This is because 200 days is a long enough time to establish the direction of the predominant trend. When the other three lines are above this average, it means that the uptrend is established. This is the last moving average that I use, and it just confirms the trend. The opposite applies if we are going from a bear or down trending market to a bull market.Īnd the EMA 200? This line I usually colour grey and make it dashed. We wouldn’t be in the market anyway when this happens, because the green would have stopped us out, but if the reversal continues, our next trade signalled by the red line would be short. If they come down and cross this signals a change in the trend, and we would think of trading short rather than long.
Normally, in an uptrend, the red and green are above the blue. On the other hand, the third line, SMA 60, which I colour blue, gives us information. The first two lines give us signals for action, and can be used on their own for trading, although I like to use other factors to confirm the trades.
SMA 40 is a great basic indicator of an exit point, and you will also become familiar with others to enhance your trading performance. You have to remember that you don’t make a profit (or a loss) until you sell, and you need to pay attention to your ‘exit’ so that you maximise your opportunity. Just to digress again, I think that people place too much emphasis on finding a perfect ‘entry’, that is, the absolute ‘best’ time to buy. If we are shorting the stock, the green still gives us the signal, but obviously it’s when the price goes above. If the price goes below the green, the stock is sold and we have our profit. Generally, that will automatically lock in our gains. It gives us a moving stop loss, and if we have a stop loss in the market, then we should move it according to this line. This is a very useful line, as it shows us when to get out of the trade. The next average, SMA 40, the 40 day average, I usually make green. For example, when the trend is up and the price is above the red line, I look at opening a long trade, buying the stock. The trade will be long or short, depending on the trend. The shortest term average I use, SMA 20, which I like to colour red, is the signal to open a trade. The principle is that when a line or price crosses another line, which is a definite and unambiguous signal, we can relate it to a particular action that we want to take. You always need to remember the use of all these lines, so we’ll go over it now. It’s unusual to see anything other than a day used in this context, though.
The number after the average is how many days (or time periods, if you’re using something other than a day) are averaged. Actually, there are some other types, but I won’t bother to explain them here, as these are all we need for our trading. If you remember, there are two types of moving average – the simple moving average (SMA) which is just an ordinary average as we know them, and an expo-nential moving average (EMA) which adds more significance to recent data (makes it closer to the current value). They are called moving averages, as they move each day – the oldest value is dropped off, and the newest picked up, to go towards today’s moving average. You should know what moving averages are from your previous studying, but if you don’t, they are the average value of the last so many days of values, and they smooth the prices out so that you can see better which way and how much they are moving.
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