Moving averages are a popular tool in stock trading, used to smooth price data and identify trends. There are two main types:
- Simple Moving Average (SMA) – The average of a stock’s price over a set number of periods.
- Exponential Moving Average (EMA) – Similar to SMA but gives more weight to recent prices.
How Traders Use Moving Averages:
1. Trend Identification
- If the stock price is above the moving average, it’s an uptrend.
- If below, it’s a downtrend.
2. Crossover Strategies
- Golden Cross: When a short-term MA (e.g., 50-day) crosses above a long-term MA (e.g., 200-day), it signals a bullish trend.
- Death Cross: When a short-term MA crosses below a long-term MA, it signals a bearish trend.
3. Support & Resistance
- Moving averages often act as dynamic support or resistance levels.
4. Mean Reversion Trading
- Stocks tend to return to their moving averages, so traders look for overextended price moves to trade reversals.
5. Moving Average Ribbon
- A series of MAs plotted together to show trend strength and potential reversals
