Today I’m discussing a technical indicator that I've used for decades. If I was forced to to only pick one technical indicator, hands down, it would be moving averages. I'll break down the types of moving averages, which ones I use, and I'll show you how I use them with a real life example.
There are 4 kinds of moving averages.
Simple Moving Average (SMA): This is the simplest form of a moving average. It calculates the average of price data over a specific number of periods.
Exponential Moving Average (EMA): Places more weight on the most recent prices, and therefore reacts more quickly to price changes than the simple moving average.
Weighted Moving Average (WMA): Assigns more weight to the more recent price data, similar to the EMA, but calculated differently.
Smoothed Moving Average (SMMA): Is a blend between a Simple Moving Average and an Exponential Moving Average.
I use the first two with the following setups:
The 100 and 200 simple moving averages
The 10, 20 and 50 exponential moving averages.
And here is why:
The 100 and 200 simple moving averages track a stock's average price over the last 100 or 200 days.
The 10, 20, and 50 EMA give more weight to recent prices so
I lean towards EMAs, for the shorter timeframes as they react quicker to recent price changes.
The 100 and 200 give me a better longer term perspective.
Combining moving averages with candlesticks has been a powerful tool for me over the years. I often lean on moving averages to pinpoint where I might want to buy shares of a stock, sell puts, as well as where I want to exit position. Watching how a candle interacts with moving averages helps me determine where the future direction of a stock might go.
When I spot a stock closing above its moving average, it indicates the stock is bullish, but if a stock rejects right off that moving average that’s normally bearish.
Lets look at PG. I have circled 10 examples (this is all the same chart just separated.)
In the examples above you can see how the candles interact with moving averages, and I gave you my analysis on how I use moving averages to determine future moves. It doesn't always work, but nothing does.
Do not forget to zoom in and out. The examples above were from the daily chart. But, you can see moving averages lining up whether you're zooming in on a 5-minute chart or taking a bird's-eye view on monthly data. If you see similar trends on different charts? That’s like a green light for my confidence, think of it like a double or triple confirmation.
I use moving averages to choose my strikes for selling puts at support, and decide where to sell covered calls or even some shares when we hit a moving average. Yep, they’re just lines, but hey, they've been good to me. If they give you an edge, that’s a win in my book! This chart below is zoomed way out, but I have a strategy called "buy Apple off of the blue line" do you see why? Every time apple hits the 100 moving average on the weekly chart I buy some. It has been a good strategy for me.
You can make your strategy as simple as buying stocks you like off of a moving average. It works when the stock is in an uptrend! Or you can make it as complex as you want as well. Just make a plan and start following it!
Keep Calm and Let Theta Do the Work! Until next time happy trading Good Kids!