Moving Averages Explained for Beginners

Tyler Stokes

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When studying any subject, it’s essential to start with the basics to build a strong foundation. When it comes to technical analysis, one of the first concepts beginners should grasp is moving averages.

The promise of mastering moving averages is you can easily identify the trend, and predict where it’s headed. This is essential information every trader must know about the market they’re trading in.

In this article, we’ll cover the basics of two primary types of moving averages: Simple Moving Averages (SMAs) and Exponential Moving Averages (EMAs).

Simple Moving Averages (SMAs)

What is an SMA?

A Simple Moving Average (SMA) is a widely-used technical indicator that helps smooth out price data over a specified period. It is calculated by taking the average of the closing prices of an asset over a certain number of periods.

For instance, a 50-day SMA calculates the average closing prices of the last 50 days. A 50-week SMA calculates the average closing prices of the last 50 weeks.

A moving average can act as support or resistance.

How to Interpret SMAs

  • Trend Direction: The primary use of SMAs is to determine the trend direction. If the SMA is sloping upwards, it indicates a bullish trend, suggesting that prices are generally rising. Conversely, if the SMA is sloping downwards, it signifies a bearish trend, indicating that prices are generally falling.
  • Key Levels: A common practice among traders is to use the 50-week SMA to gauge market sentiment. When the price is above the 50-week SMA, it is considered bullish, while a price below this level is considered bearish.

Practical Example:

Let’s say you are analyzing a stock on TradingView and you plot a 50-day SMA on the chart. If the stock’s price is consistently above the 50-day SMA and the line is sloping upwards, it signals a strong uptrend. Conversely, if the price is below the SMA and the line is sloping downwards, it indicates a downtrend.

Exponential Moving Averages (EMAs)

What is an EMA?

An Exponential Moving Average (EMA) is a type of moving average that gives more weight to recent prices, making it more responsive to new information. This characteristic makes EMAs particularly useful for identifying momentum in the market.

How to Interpret EMAs

  • Momentum Indicators: EMAs are often referred to as momentum indicators. They react more quickly to price changes than SMAs, providing timely signals.
  • Crossovers: A popular trading strategy involves the use of EMA crossovers. For example, when the 8-period EMA crosses above the 21-period EMA, it is a bullish signal indicating a potential upward move. Conversely, when the 8-period EMA crosses below the 21-period EMA, it is a bearish signal suggesting a potential downward move.

Practical Example:

Imagine you are analyzing a stock on TradingView and you plot both the 8-day and 21-day EMAs. If the 8-day EMA crosses above the 21-day EMA, it signals that the market may be gaining upward momentum. On the other hand, if the 8-day EMA crosses below the 21-day EMA, it suggests that the market may be losing momentum and a downward move could be imminent.

Using SMAs and EMAs Together

Combining SMAs and EMAs can provide a more comprehensive view of the market. While SMAs help identify the overall trend, EMAs can give more timely signals about momentum changes. By using both indicators, you can better predict tops and bottoms, and identify support and resistance levels.

Practical Tips

  • Trend Confirmation: Use SMAs to confirm the overall trend direction and EMAs to identify momentum shifts within that trend.
  • Support and Resistance: Moving averages can act as dynamic support and resistance levels. For example, if the price bounces off an SMA or EMA, it could indicate a strong support or resistance level.
  • Trading Decisions: Combine moving averages with other technical indicators to make well-informed trading decisions.

Best Moving Averages for Day Trading

Day trading involves making numerous trades within a single trading day, often capitalizing on small price movements. For this reason, shorter time frames are more suitable. Day traders typically use charts with shorter time frames, such as 1-minute, 5-minute, and 15-minute charts.

Recommended Moving Averages for Day Trading

  • 9-day EMA: Provides quick signals and is highly responsive to recent price changes.
  • 20-day SMA: Helps to identify the short-term trend and is commonly used to confirm signals from the 9-day EMA.
  • 50-day SMA: Acts as a reference point for identifying significant support and resistance levels during intraday trading.

Best Moving Averages for Swing Trading

Swing trading involves holding positions for several days to weeks, aiming to profit from medium-term price movements. Hence, longer time frames are preferred. Swing traders typically use daily, weekly, and monthly charts to analyze trends.

Recommended Moving Averages for Swing Trading

  • 50-day SMA: Offers a good balance between capturing the medium-term trend and responding to price changes.
  • 100-day SMA: Helps to identify the longer-term trend and significant support and resistance levels.
  • 200-day SMA: A key indicator for understanding the overall market sentiment and long-term trend direction.

Conclusion

Moving averages are powerful tools that can help you navigate the complexities of the market. By understanding and utilizing both Simple Moving Averages and Exponential Moving Averages, you can enhance your trading strategy and make more informed decisions. Whether you are day trading or swing trading, selecting the appropriate moving averages is crucial to your success. Remember to practice these concepts on TradingView and integrate them into your trading routine to maximize their effectiveness.

Key Insights

Simple Moving Averages (SMAs):

  • Used to determine trend direction.
  • Calculated as the average of the last “X periods”. A period can be a day, week, month and so on.
  • Slope of the moving average is important: sloping up indicates a bullish trend, sloping down indicates a bearish trend.
  • Price above the 50-week MA is bullish; below it is bearish.

Exponential Moving Averages (EMAs):

  • Applies more weight to current data, making it more responsive.
  • Known as momentum indicators.
  • When the 8 EMA crosses below the 21 EMA, it signals a bearish trend; when the 8 EMA crosses above the 21 EMA, it signals a bullish trend.
  • Weekly candle closes below the 8 EMA indicate lost momentum.

Combined Use:

  • Using SMAs and EMAs together helps determine trend direction, tops and bottoms, and support and resistance levels.
  • Essential for making informed trading decisions when combined with other tools.

About the author

Hi I'm Tyler Stokes. I started my day trading journey in 2024. As a pure beginner I decided to document everything on this website. I plan to share all the ups and downs of becoming a day trader on this website and through social media.