Performing Technical Analysis With Moving Averages:
Moving Averages (MA) are some of the most widely used technical indicators in both trading and investing. In essence, they help smooth out price action by filtering the impact of rapid, short-term price fluctuations that can be difficult to decipher. As a result, market participants use them to pinpoint support & resistance levels and identify bullish or bearish trends, among other uses. Keep in mind, however, that moving averages lag current price action because they are based on past prices. And the longer the time period, the larger the lag. Consequently, long-term investors tend to monitor longer time periods (50-Day, 100-Day, etc.), while short-term traders tend to use shorter time periods (10-Day, 20-Day, etc.).
The two most commonly used forms of moving averages are Simple Moving Averages (SMA) and Exponential Moving Averages (EMA). The calculation for each is slightly different with the main difference being EMA’s put increased weight on recent prices. Each moving average on their own can be viewed as an important signal, but monitoring them together can help predict and/or confirm trends. For example, when a shorter-term moving average crosses a longer-term moving average to the upside, that’s known as a bullish crossover which can help pinpoint an uptrend or buying opportunity. On the flip side, when a shorter-term moving average crosses a longer-term moving average to the downside, that’s known as a bearish crossover which can help pinpoint a downtrend or selling opportunity. Overall, moving averages are critical to both traders and investors in various applications and facets.
Bonus Info: When the 50-day moving average crosses above the 200-day moving average, it’s known as the Golden Cross. Conversely, when the 50-day moving average crosses below the 200-day moving average, it’s known as the Death Cross.