Class 3: Moving Averages
Golden Cross and Death Cross of two moving averages, 50-day and 200-day MAs. A golden cross is considered a bullish sign. It occurs when the 50-day moving average rises above 200-day moving average. A death cross is considered a bearish sign. It occurs when the 50-day moving average moves below 200-day moving average.
A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random short-term price fluctuations. It is a trend-following, or lagging, indicator because it is based on past prices.
From Investopedia:
“The two basic and commonly used moving averages are the simple moving average (SMA), which is the simple average of a security over a defined number of time periods, and the exponential moving average (EMA), which gives greater weight to more recent prices.
The most common applications of moving averages are to identify the trend direction and to determine support and resistance levels. While moving averages are useful enough on their own, they also form the basis for other technical indicators such as the moving average convergence divergence (MACD).”
What Do Moving Averages Tell You?
Moving averages lag behind current price action because they are based on past prices; the longer the time period for the moving average, the greater the lag. Thus, a 200-day MA will have a much greater degree of lag than a 20-day MA because it contains prices for the past 200 days.
The length of the moving average to use depends on the trading objectives, with shorter moving averages used for short-term trading and longer-term moving averages more suited for long-term investors. The 50-day and 200-day MAs are widely followed by investors and traders, with breaks above and below this moving average considered to be important trading signals.
Moving averages also impart important trading signals on their own, or when two averages cross over. A rising moving average indicates that the security is in an uptrend, while a declining moving average indicates that it is in a downtrend.
Similarly, upward momentum is confirmed with a bullish crossover, which occurs when a short-term moving average crosses above a longer-term moving average. Downward momentum is confirmed with a bearish crossover, which occurs when a short-term moving average crosses below a longer-term moving average.
Predicting trends in the stock market is no simple process. While you can not predict what will happen exactly, you can give yourself better odds using technical analysis and research. Putting your research and technical analysis to the test in the market would require a brokerage account. Picking a broker can be frustrating due to the variety among them, but you can pick one of the best online stockbrokers to find the right platform for your needs.
Key Takeaways
- A moving average is a technique often used in technical analysis that smooths price histories by averaging daily prices over some period of time.
- Simple moving averages (SMA) takes the arithmetic mean of a given set of prices over the past number of days, for example over the previous 15, 30, 100, or 200 days.
- Exponential moving averages (EMA) uses a weighted average that gives greater weight to more recent days to make it more responsive to new information.
- When asset prices cross their moving averages, it may generate a trading signal for technical traders.
