Chapter 1 - What is a Moving Average?

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A moving average will be the average price for a trading instrument over a set time frame. A simple moving average SMA is an indicator that shows a line on a chart based on the calculation of the average price of a trading instrument over a set number of time periods.

An exponential moving average EMA gives greater weight to recent prices, to make it more reactive and faster to adjust to price action. An EMA changes faster to account for recent price action, and gives traders faster entry and exit signals than a simple moving average.

A weighted moving average WMA assings a weighting factor to each price in the price period for calculation, according to its age. the most recent data gets the most weight, and each price value gets less weight as the data is calculated backwards for the prices in the time period. A weighted moving average gives more value to the most recent prices, and less as prices become older.

Don´t get caught up in the differences or importance of these types of moving averages. In the long run, it will be the principles of your trading and the quality of your trading signals that create profitability, more than which type of moving average is the "best". The point is to identify and capture trends with the moving averages you choose, for your own time frame

Remember, the shorter the time frame, the more prices are subject to noise and the random nature of buyers and sellers. The higher you go on the time frame, the more you can see trends and the patterns of accumulation and distribution of a market, near key moving averages.

In uptrends, price tends to stay above a key moving average. In downtrends, price typically stays below the key moving average. The first possibility of a change in trend is when price crosses through the moving average that it had previously been trending consistently on the other side of.

5 day EMA

This is a sign of strong momentum. It tracks the trend in the short term time frame. this line can only be used in low volatility trends with strong momentum. It is rare that this line does not break intraday, even in the strongest trending markets.

10 day EMA

Is a great moving average to use to keep you on the right side of the major market trend. Usually the first line to be lost before any real trouble begins.

21 day EMA

Intermediate term moving average. It is generally the las line of support in a volatile uptrend. Inevitable reversion to the mean in a market when it finally pulls back after an extended trend.

50 day SMA

This is the line that strong leading stocks typically pull back to. It is normal for uptrending markets to pull back to this line and find support.

100 day SMA

Line that provides the support between the 50 day and the 200 day. If it does not hold as support, there is a high probability that the 200 day SMA is the next stop.

200 day SMA

Bulls like to buy dips when markets are trading above the 200 day moving average, while bears sell rallies short below it. This line is one of the biggest signals in the market telling you which side to be on. Bad things happen to stocks and markets when this line is lost.

Remember:

Moving averages are not the holy grail of trading. they are tools to help a trader capture a trend in their own time frame

moving averages work best in low volatility markets

moving averages have meaning because they are used by so many market participants

moving averages are the average of past price data, they aren´t predictors.

What we learned:

A moving average is an average of prices over a certain time period

There are simple, exponential, and weighted moving averages

Moving averages filter and smooth price data, and help identify trends

Moving averages can be used on all time frames, intraday, daily, weekly and monthly