Moving averages
A moving average is a rolling average of data points. They are a great way of uncovering the underlying move of the market quickly and efficiently. There are many strategies that incorporate moving averages such as momentum trading, mean reversion and cross overs.
Moving averages frequently act as supports and resistance. The most commonly used moving averages are 200sdma (simple day moving average) , 50sdma and 8sdma on the daily charts. On a weekly chart the moving averages would be the weekly equivalent of the daily moving averages.
The shorter the moving average the more prone it is daily fluctuations and whipsaw. The shorter the moving average the closer it will follow the market price. There are a variety of types of moving averages and some of them have complicated formulas. It's really unnecessary; it gives you no real edge in trading. The only other type of moving average that I would recommend is the exponential moving average which is more sensitive to more current prices. The first picture shows an example of mean reversion trading where entries were made as the price strayed away from the moving average and starts to come back towards the average. The second picture shows how a cross over of 50 sdma and 200 sdma was used as a buy indicator.
Moving averages frequently act as supports and resistance. The most commonly used moving averages are 200sdma (simple day moving average) , 50sdma and 8sdma on the daily charts. On a weekly chart the moving averages would be the weekly equivalent of the daily moving averages.
The shorter the moving average the more prone it is daily fluctuations and whipsaw. The shorter the moving average the closer it will follow the market price. There are a variety of types of moving averages and some of them have complicated formulas. It's really unnecessary; it gives you no real edge in trading. The only other type of moving average that I would recommend is the exponential moving average which is more sensitive to more current prices. The first picture shows an example of mean reversion trading where entries were made as the price strayed away from the moving average and starts to come back towards the average. The second picture shows how a cross over of 50 sdma and 200 sdma was used as a buy indicator.