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Definition: average price of a stock over the course of a designated time period
For example: a 20 Day SImple MA is the average price of the underlying security (stock) over the last 20 days
Why do we use them:
By calculating the moving average, the impacts of random, short-term fluctuations...sometimes called whipsaws, on the price of a stock over the desired time-frame are
The most commonly used types are simple and exponential.
Simple is just that, an average over the time period
Exponential is essentially the same except it more heavily weighs more current prices (more accurately captures at the moment sentiment)
Most commonly followed MA on the street are the 20-day, 50-day and 200-day.
Algorithms are programmed to act at those indicators as well
Humans are emotional. Even those that set the computer algorithms, they choose their programming also based on emotions.
Indicators are simply a measure of emotion and momentum of participants (which I’ll say again and again throughout these episodes)
So, knowing where buyers and sellers have been active in the past (based on the averages over a period) helps give you an indication of where they may be likely to engage again.
Timeframes suit the individual. Typically, investors utilize longer period MA where short-term traders make use of short-term price action to scalp profits.
If you’re curious, the moving averages I use are:
8 SMA, 20 SMA, and 200 SMA
Short term, medium and long term.
When the averages are pointing up, I’m bullish. When they’re pointing down, I’m bearish. And when they’re flat I sell credit spreads
