Tuesday June 26, 2007

Single Moving Average

Moving averages give us a different view of the trend of the market by smoothing out the price data. It’s usually calculated by using the closing prices.

Using short length moving averages can give many false alarms so its imperative that we use these in conjunction with other indicators.

Using longer moving averages gives us the bigger picture but usually they only pick up on the big trends.

The best way to use these is to use a moving average that is half the length of the cycle you are looking at.

If you are studying a 30 day chart then it would be best to use a 15 day MA. Mostly traders will use a 9 & 14 day MA to enable them to spot any signals just before the market moves.

Chart courtesy of StockCharts.com

Use the following when tracking the market when swing trading.

A 200 day MA is popular for tracking longer cycles

A 20 to 65 day MA is useful for intermediate cycles

A 5 to 20 day is used for short cycles

SMA (Single Moving Average)

The SMA is probably one of the most popular of the moving averages. The SMA gives us a signal when a stock price crosses the Moving average line.

We should go long when the price crosses above the MA line from below

We should go short when the price crosses below the MA line from above

And again always use the SMA with other indicators e.g.. Bollinger Bands

Chart courtesy of StockCharts.com

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