Moving averages are calculated to identify the trend direction of a stock or to determine its support and resistance levels. It is a trend-following or lagging, indicator because it is based on past prices. To calculate how to dump your broker and invest your own money a simple moving average, the number of prices within a time period is divided by the number of total periods. For instance, consider shares of Tesla closed at $10, $11, $12, $11, $14 over a five day period.
- Conversely, you would watch for the 15-day average to cross above the 50-day moving average to enter a long position.
- For shorter-term investors, the 10-day and 20-day SMAs are often used as well.
- I would try one system one day and then abandon it for the next hot system.
- Market participants can better understand price movements and create effective trading strategies by analyzing the SMA.
In the example, we will cover staying on the right side of the trend after placing a long trade. The 10 – SMA – popular with short-term traders; great for swing traders and day traders. Mark the difference between the 5SMA shown above and the 10SMA shown below on the same chart. Once you begin to peel back the onion, the SMA might be simple to calculate, but isn’t as simple to trade. In the figure below, the number of periods used in each average is 15, but the EMA responds more quickly to the changing prices than the SMA. The EMA has a higher value when the price is rising than the SMA and it falls faster than the SMA when the price is declining.
What Is a Golden Cross?
Typically, the cross of a stock’s 50-day above its 200-day moving average is a major signal that the stock has begun an uptrend. Conversely, when a stock’s 50-day crosses below the 200-day moving average, this can signal a new downtrend and is often referred to as the death cross. The SMA is widely used to identify trends, detect support and resistance levels, and provide a smoother representation of price movements. It is known for its simplicity and easy calculation, making it accessible to traders and investors of all experience levels.
After many years of trading, I have landed on the 20-period simple moving average. At times I will fluctuate between the simple and exponential, but 20 is my number. I’m not going to belabor the concept in this article, though, as the focus of this discussion is around simple moving average trading strategies. For those of you not familiar with displaced moving averages, it’s a means for moving the average before or after the price action. It’s around late summer at this point, and I was ready to roll out my new system of using three simple moving averages.
On the other hand, if the long-term average is above a shorter-term average then a downtrend might be the expected outcome. One of the most popular simple moving averages is the 200-day SMA. The chart above shows https://www.topforexnews.org/books/11-business-books-you-must-read/ GOOG with its 200-day moving average (purple line) along with the 50 and 15-day moving averages. We can see the stock price find support (a bounce) off the 200-day in late September and early October of 2020.
Calculating the Simple Moving Average
Trend-following with these types of charts is a common trading strategy in stocks, foreign exchange, and commodity futures. That doesn’t mean that the indicator can’t be a great tool for monitoring the direction of a trend or helping you determine when the market is getting tired after an impulsive move. Both disadvantages deal with the mental aspect of trading, which is where most traders struggle. However, understanding how to properly use this technical indicator has positioned me to make consistent profits. At times a stock will crack right through the average, but I don’t panic that a sell-off is looming. The point is, I felt that using the averages as a predictive tool would further increase the accuracy of my signals.
Moving averages are generally represented by a line on a stock chart. If the line is moving up and the stock price is above it, the stock is considered to be trending up, and vice versa for a declining line. Hopefully by now you understand that the simple moving average is not an indicator you can use as a standalone trigger. In other words, mastering the simple moving average was not going to make or break me as a trader. To illustrate this point, check out this chart example where I would use the same simple moving average duration, but I would displace one of the averages to jump the trend.
Third Trade Signal
Hopefully we’ve helped with your understanding of how simple moving averages work. Like with any strategy, we hope you’ll test them out in a simulator before https://www.day-trading.info/the-world-s-10-most-traded-currencies/ putting real money to work. Now that you have all the basics, I’d like to walk you through my experience day trading with simple moving averages.
Example of a Moving Average Indicator
I continue using the 10-period simple moving average, but in conjunction with Bollinger Bands and a few other indicators. In order to day trade crossover, the first decision you have to make is to select two moving averages that are somehow related to one another. Conversely, when the 50-simple moving average crosses beneath the 200-simple moving average, it creates a death cross.
This is something I touched on briefly earlier in this article, essentially with a lagging indicator, you will never get out at the top or bottom. Technical indicators and systems lead to more indicators to try and crack the ever-elusive stock market. The reality is that I would jump into trades that would never materialize or exit winners too soon before the real pop.
Finance Strategists has an advertising relationship with some of the companies included on this website. We may earn a commission when you click on a link or make a purchase through the links on our site. All of our content is based on objective analysis, and the opinions are our own. Below is a charting example that illustrates how each average responds to price.