top of page

MOJO Day Trading Technical Analysis: Moving Averages

Most traders use moving averages when studying chart patters. A moving average is the average price of a security over a set amount of time. The three most common types of moving averages are simple, linear and exponential.

Simple Moving Average (SMA) This is the most common method used to calculate the moving averages. It simply takes the sum of all of the past closing prices over the time period and divides the result by the number of prices used in the calculation. For example, in a 10-day moving average, the last 10 closing prices are added together and then divided by 10.

Linear Weighted Average This moving average is the least common and is used to address the problem of the equal weighting. The linear weighted moving average is calculated by taking the sum of all the closing prices over a certain time period and multiplying them by the position of the data point and then dividing by the sum of the number of periods. For example, in a five-day linear weighted average, today's closing price is multiplied by five, yesterday's by four and so on until the first day in the period range is reached. These numbers are then added together and divided by the sum of the multipliers.

Exponential Moving Average (EMA) This moving average calculation uses a smoothing factor to place a higher weight on recent data points and is regarded as much more efficient than the linear weighted average. Having an understanding of the calculation is not generally required for most traders because most charting packages do the calculation for you. The most important thing to remember about the exponential moving average is that it is more responsive to new information relative to the simple moving average. This responsiveness is one of the key factors of why this is the moving average of choice among many technical traders.

Major Uses of Moving Averages Moving averages are used to identify current trends and trend reversals as well as to set up support and resistance levels.

Moving averages can be used to quickly identify whether a security is moving in an uptrend or a downtrend depending on the direction of the moving average.

As you can see here, when a moving average is heading upward and the price is above it, the security is in an uptrend. Conversely, a downward sloping moving average with the price below can be used to signal a downtrend.

Moving average trend reversals are formed in two main ways: when the price moves through a moving average and when it moves through moving average crossovers. The first common signal is when the price moves through an important moving average.

For example, when the price of a security that was in an uptrend falls below a 50-period moving average, like here, it is a sign that the uptrend may be reversing.

The other signal of a trend reversal is when one moving average crosses through another.

For example, as you can see in here, if the 15-day moving average crosses above the 50-day moving average, it is a positive sign that the price will start to increase.

If the periods used in the calculation are relatively short, for example 15 and 35, this could signal a short-term trend reversal. On the other hand, when two averages with relatively long time frames cross over (50 and 200, for example), this is used to suggest a long-term shift in trend.

Another major way moving averages are used is to identify support and resistance levels. It is not uncommon to see a stock that has been falling stop its decline and reverse direction once it hits the support of a major moving average. A move through a major moving average is often used as a signal by technical traders that the trend is reversing. For example, if the price breaks through the 200-day moving average in a downward direction, it is a signal that the uptrend is reversing.

Moving averages are a powerful tool for analyzing the trend in a security. They provide useful support and resistance points and are very easy to use. The most common time frames that are used when creating moving averages are the 200-day, 100-day, 50-day, 20-day and 10-day. The 200-day average is thought to be a good measure of a trading year, a 100-day average of a half a year, a 50-day average of a quarter of a year, a 20-day average of a month and 10-day average of two weeks.

Moving averages help technical traders navigate the market with day-to-day price movements, giving traders a clearer view of the price trend. Find out more about becoming a ProTrader in the next class of MOJO University. That starts on in October. Get your MOJO on! See more here >

Featured Posts
Recent Posts
Archive
Search By Tags
Follow Us
  • Facebook Basic Square
  • Twitter Basic Square

Billing & General Support - 

Disclaimer: “Day trading can be extremely risky…You should be prepared to lose all of the funds that you use for day trading. In particular, you should not fund day-trading activities with retirement savings, student loans, second mortgages, emergency funds, funds set aside for purposes such as education or home ownership, or funds required to meet your living expenses. Further, certain evidence indicates that an investment of less than $50,000 will significantly impair the ability of a day trader to make a profit. Of course, an investment of $50,000 or more will in no way guarantee success.”

 

MOJO Day Trading is a provider of stock market education. MOJO Day Trading is not a registered as an investment adviser either with the U.S. Securities and Exchange Commission or any other federal, governmental or regulatory authority. The business services and activities of MOJO Day Trading do not requires any such registrations. You understand and acknowledge that there is a very high degree of risk involved in trading securities. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results of any individual trader or trading system published by Company are not indicative of future returns by that trader or system, and are not indicative of future returns which be realized by you. In addition, the indicators, strategies, columns, articles and all other features of Company's products (collectively, the "Information") are provided for informational and educational purposes only and should not be construed as investment advice. Examples presented are for educational purposes only. Such picks, alerts, set-ups are not solicitations of any order to buy or sell. Accordingly, you should not rely solely on the information in making any investment. Rather, you should use the Information only as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment. Any and all information discussed is for educational and informational purposes only and should not be considered tax, legal or investment advice. A referral to a stock, commodity, cryptocurrency is not an indication to buy or sell that stock, commodity or cryptocurrency.

 

MOJO Day Trading may publish testimonials or descriptions of past performance but these results are NOT typical, are not indicative of future results or performance, and are not intended to be a representation, warranty or guarantee that similar results will be obtained by you. Michael Rich’s experience with trading is not typical, nor is the experience of students featured in testimonials. They are experienced traders. Becoming an experienced trader takes hard work, dedication and a significant amount of time. Your results may differ materially from those expressed or utilized by MOJO Day Trading due to a number of factors. We do not track the typical results of our current or past students. As a provider of educational courses, we do not have access to the personal trading accounts or brokerage statements of our customers. 

 

Please note: Hypothetical computer simulated performance results are believed to be accurately presented. However, they are not guaranteed as to accuracy or completeness and are subject to change without any notice. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Since, also, the trades have not actually been executed; the results may have been under or over compensated for the impact, if any, of certain market factors such as liquidity, slippage and commissions. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any portfolio will, or is likely to achieve profits or losses similar to those shown. All investments and trades carry risks.

 

If you do not agree with any term or provision of our Terms and Conditions you should not use our Site, Services, Content or Information. Please be advised that your continued use of the Site, Services, Content, or Information provided shall indicate your consent and agreement to our Terms and Conditions.  

 

Copyright (c) MOJO Day Trading, LLC. 2012-2023. All Rights Reserved. No part of this presentation, webinar or any of its contents may be reproduced, copied, modified or adapted.

This does not represent our full Disclaimer. Please read our complete disclaimer
 

bottom of page