How To Use Moving Averages

Moving Averages (MA) are one of the most fundamental indicators that traders can use in the markets today. The best part about them happens how simple yet powerful they are and also, they are free on most trading platforms. Here at Simpler Trading, we can recommend using Moving Averages on trusted platforms such as tastyworks, thinkorswimor TradeStationhowever, aside from it being free, it’s easy to learn and when you get the hang of it, it can be a very beneficial indicator that can help you be a better trader.

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Video Guide to Moving Averages

What is a Moving Average?

The basic function of Moving Averages gives the average price history of a specified day which could be set anywhere from 5 to a 200-day moving average. However, with the information it gives, it helps establish key data that will greatly help traders with their strategies.

Benefits using the Moving Average (MA)

  • Pinpoint entry and exit points
  • Identify bullish and bearish trends
  • Recognize support and resistance levels

In addition, it’s a versatile and fully customizable indicator that has many features in its basic settings. Moving Averages also has many variations that can work well with most traders. They can then use their indicator in any way they see fit in accordance with their strategy. Below you can see in the image how the moving average is used in line with other indicators like the Moving Average Convergence/Divergence (MACD) and Relative Strength Index (RSI). The red line on the chart is the Moving Average, and as you can see anytime the trend line dipped, it did so being in sync with the RSI and the MACD, however, this is just one basic example.

Moving Average Trading Strategies

As stated before, Moving averages are very versatile and have different variations that traders use for various strategies. Below are the MAs you can use in the market, so be sure to check out which one works for you.

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Simple Moving Average (SMA)

The SMA indicator is a technical tool that gets its information by adding recent data points in a given set and dividing the data points by the number of time periods. The basic principle of using the SMA in your trading strategy is to identify the trend direction and notice if it’s going to be a bullish or bear trend.

The indicator is typically set at the 200-day which will give the trader enough data to analyze the broad-range price action and make a determination. For example, if the trend is going to be bullish, the trend line will be moving at an upward angle. If the trend is going to be bearish, then the trend line will be at a downward angle, see the images below for reference.

Bullish Trend

Bearish Trend

Exponential Moving Average (EMA)

EMA’s place more of an emphasis on the most recent price points in a stock and is considered a great indicator for short-term traders to use. Plus, its sensitivity to time gives short-term traders a more accurate reading of what they’re looking for.

Most short-term traders set the EMA indicator to the 21-day because on average most stocks move away and come back to the 21-day EMA. Depending on your trade strategy and position, the EMA can offer great opportunities to make day trades or short stocks.

The difference between the SMA and the EMA?

The main difference between the two indicators is the sensitivity that each indicator places on time. The SMA isn’t as weighted to time as the EMA is, the SMA takes into account a position in a long-term viewpoint and places the same emphasis in all time periods.

The EMA can be used for longer periods but the effectiveness of using it for anything longer than for short-term trades drops significantly in terms of usefulness. Both are fantastic indicators, however, the SMA is typically used for long-term exposure to stock, And the EMA is used for short-term exposure to a stock.

What to Watch out for Using Moving Averages?

Moving averages can be a great indicator to use while trading in the stock market and it’s because of their versatility and their applicability to many types of trading that popularize them amongst traders. However, as great as they are, they are not immune to limitations and risks that traders need to be aware of. For example, Moving Averages is a technical indicator that gets its information from past price actions. There is no guarantee that historical data will generate future directional trends.

There is an argument that can be made where some traders believe that all historical data has been accounted for and that the current price of a stock represents all information available to the general public.

Another issue that traders need to be concerned with, is if the greater emphasis on the most recent price action is indeed the best route to take for short-term traders. Some traders believe that if more weight and importance is placed on the most recent price action, then that may lead to a skewed viewpoint within the market. This may lead to losses instead of gains for the trader.

Moving Averages are a popular and versatile indicator that many traders use within the market, but they still come with risks. It’s important for each trader to do their research and follow their trade plans. Here at Simpler Trading, we can offer you professional insight with the MEM Edge Report. The report is personally devised and prepared by Mary Ellen Mcgonagle herself. If you sign up today you’ll get access to her report twice a week, so that way you can trade with confidence.

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