Monday July 15, 2024

Brother Bill of 

Moving Averages are a popular method used in Technical Analysis for following trends after a breakout. They can often show entry points as well as potential selloffs in the making. SMA’s are just as they sound, they adjust over a specified time period to create their average.

 The 50 day and the 200 day SMA’s are highly regarded as “recognized” meaning that they are well known in the investing world. Some even incorporate the 20 day SMA for quick pullbacks and bounces.

Day traders may want to consider using the Exponential Moving Average as they are smoother for shorter time frames. We’ll be posting a piece about EMA’s shortly.

To calculate the average of a SMA one would simply take the closing prices of the past 50 days, add them up, then divide by 50. That sum number then becomes the 50 day moving average. 

You don’t have to concern yourself with calculating them out on your own ( I did for the first few years I started investing, it allowed me to see daily price movements clearer ) All trading platforms and charting services have them built in and ready to go, all you have to do is click to add them to your chart.

Whenever a smaller numbered moving averages crosses up north of a larger moving average it is referred to as a “Golden Cross” This is considered a bullish move.

The inverse of that would be if a smaller moving average breaks below the larger moving average that is referred to as a “Death Cross” This is considered a bearish move.

This 3 year chart of AMZN using daily bars shows a “Death Cross” in red after the start of 2022. This method of using SMA’s would have had you re-enter at the start of June 2023 when it created a “Golden Cross” which is shown in blue.

The SMA is also popular with investors as it is used for when price touches the SMA then bounces it often signals add on area.

SMA’s like all indicators are lagging, the beauty about these is that they are well suited for swing traders and longer term investors that want to reduce noise from any volatility. 

Invest wisely, live charitably and be well

Brother Bill

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