Moving Averages 101


moving averages 101What is a Simple Moving Average? defines a simple moving average (SMA) as:

A simple, or arithmetic, moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods.  Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react.

Moving averages can be defined in virtually any time frame.  The two most common are the 50 and 200 day moving average (DMA) lines.   These are also known as the 10-week and 40-week moving averages.

Most Common Moving Averages

moving averages 101The 50 and 200 DMA lines simply look at the past 50 or 200 days and a line is drawn to illustrate the average close during that period.

In a healthy uptrend, you want to see the both moving averages slope higher.  The 50 DMA line should reside above the longer term 200 DMA.

When the 50 DMA turns lower, or slices below its longer term 200 DMA counterpart it is usually a sign of weakness.  Some technical trading systems flash buy/sell signals when either moving average “crosses over” the other.


Other Moving Averages

moving averages 101Several studies show that leading stocks tend to pull back and find support at their respective 10 and 21-day moving averages before resuming their prior trend. These are shorter term moving averages and tend to be more volatile in nature. However, they are still an important way to gauge the underlying health of a stock. They are even used by some investors as a healthy area to accumulate a position.  

An important intermediate term moving average is the 150-day moving average (30-week). The 150 DMA is an important gauge that defines the intermediate term health of a stock (or market). 

Price vs. Moving Averages

If the price of a stock or a market is trading above a moving average then the action is healthy.  If the price is trading below an important moving average then the action is not as healthy.   …Yes, it is THAT simple.

It is also healthy to see a stock move back to a moving average on light volume during an uptrend and then bounce off that moving average on higher volume. This is both natural and healthy.  Most leading stocks and markets tend to do this as they move higher.  Moving averages offer prudent investors a chance to accumulate a position as the underlying investment pulls back to a logical area of support. 

Be careful!  A technical sell signal will be triggered once an important moving average is broken especially if volume is heavy. This is an important warning sign most investors should look for.


Simple Rule of  Thumb:

As a simple rule, only look to buy when the underlying price is above an important moving average and go short when the price is below an important moving average. This is the basic rule, but of course, like any rule, it is important to know when it is o.k. to break that rule!







Here are more articles you may like

Claim Your Free Guide Today

Give us your email and we will give you the tools to change your life. 


Learn about Early Entry Points & much more...

© ChartYourTrade | Contact us:

Disclaimer: All communication from ChartYourTrade is general in nature and for educational and general informational purposes only. Under no circumstance should it be considered personalized investment advice. All our work is general in nature and not specific to any one person. All the information on this site and/or that originates from us, or any of our partners or affiliates, is for educational and informational purposes only and is NOT a recommendation to buy or sell anything. To avoid any conflicts of interest, we do not have a working relationship with any of the companies mentioned in our work. Furthermore, we may have a long, short, or no position in any, or all, of the names that appear in our work and they may change at any time without notice. Investing and trading in capital markets or using margin carries a high level of risk and may not be suitable for all investors. Leverage can work against you as well as for you. Before you decide to invest or trade in capital markets you should carefully consider your investment objectives, level of experience, and risk appetite, among other factors. The possibility exists that you could sustain a loss of some, all, or more of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with capital markets, investing/trading, and seek specific investment advice from an independent financial advisor and other professionals. Remember all the information we provide is for educational and general informational purposes only and is subject to change without notice.

Charts and Data are courtesy of MarketSmith Incorporated. Join MarketSmith here.

Terms of Service