Moving Averages,
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It’s important to use moving averages as part of a buy / sell signal simply because, everyone else does . And as Mr. Spock once said “The buying power of the many outweighs the buying power of the few.”
Traders use MA to determine the current trend of a stock and gauge support and resistance levels. By calculating the closing prices over a set period and dividing by that number of days, you can get a smooth view of the past.
I'm sure you didn't need a defination of what a moving average is, but I woud feel incomplete if I didn't give one.
Most charts default to the use of simple MA over the exponential. There is a slight difference between a simple moving average and an exponential.
While SMA calculates the mean over a set number of trading days, the EMA gives more weight to the latest data. The advantage being, the EMA reacts faster to recent price changes.
I’ve compared using the EMA vs. using an SMA. The EMA is a wee more accurate. Not enough to make a difference. IMHO.
Trends Averages won’t predict future trends. They will confirm that your stock is already in one. As long as your stock is riding above the MA, traders will continue to buy. But break through that line and its over.
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In this chart, SINA breaks below its averages during the beginning August. You could have kept away from this stock or shorted it.
By August 22 we have some bullish activity. SINA rises above the averages and trends up. Call me crazy, but I plotted the 20 day EMA and SMA. The stock's volatility would determine how far apart these two lines would be.
What’s the best MA day count? It depends on what’s been lucky for that individual trader. I've seen 10 day MA, 13 day MA and 20 day MA all set as a default on different web sites. William O’Neil like to use the 10 day MA for the short term.
Use under 20 days when looking for short term trends. 50 days is fine for medium term. I've read some financial sites which claim never to trade stocks that are below a 200 day moving average.
Moving averages can be thought of as a psychological barrier. When prices break through it’s the sign of positive momentum. When they fall below, its not.
It’s often said on Wall Street “don’t follow the crowd”. When it comes to trading on averages, you do. As I said somewhere up above, the inital crossing of a price to it's moving average is what sets off the buy & sell orders. You want to join the party when it first starts.
• Forget about using MA during a sideways trend
• When the price lines crosses above the MA, buy. When the price line crosses under, sell.
• Some traders use the crossing of two MA to signal a buy or sell. Clearstation.com says when a 13 day EMA crosses over a 50 day EMA you have a buy. Sell signal occurs when the 13 day EMA crosses under the 50 day EMA.
Did Clearstation.com figure out the Holy Grail of moving averages? I suspect one day the owner made a ton of money using the 13 day & 50 day EMA....and now it's part of his repertoire.
• MA should be used in conjunction with other tools. While MA is great at letting you know there is a trend, don’t expect a warning system if trends should break down. Most techie tools show how wonderful the past was.
I’ve seen charts plot the crossover of 10 seperate moving averages. Neurotic or efficient? It all depends on what made you money the last time you used it.
Don’t make yourself crazy.
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