One of the many tools you can use in trading are moving averages. But which ones? How many? Simple or Exponential? To me it really isn’t that crucial but whatever you choose its important to stick to that set of parameters and use them for simplifying your workflow in determining the trend of the market and new opportunities to trade. As a trend trader it really is the best way to define a general direction in which a market is developing.
Some traders don’t like using moving averages as they prefer pure price action on the chart. I think they are useful for filtering and scanning purposes but its just a roadmap to give you a quick visual of where trend has been and is likely going. Moving average crossovers are useful in seeing when trends are shifting and a clear sign to change your trading bias from bullish or bearish. Also I use the slope of the moving averages to see how strong a trend is. For example when an uptrend is strong, all the moving averages on a chart should be “stacked positive” with each one higher than the next longest one.
Simple vs Exponential
I like to use both simple and exponential moving averages on the daily timeframe chart. Simple MA’s are just basic moving averages that show you the average price of the previous number of trading days. A 50 day simple MA is the average price traded the last 50 trading days. An exponential moving average is a weighted average that assigns greater weight to the most recent data. So an EMA will always focus more on “what’s going on right now” as opposed to the broad simple moving averages showing the “big picture.”
Daily Timeframe Charts
I like to have the broad simple moving averages on my charts that are well known to show the big picture trends. The 50 and 200 day MA’s are widely used and its good to know where they exist. Sometimes when price breaks through the 50 day MA, I will also make visible the 100 day MA, to see how far it is from the 200 day. Generally if there is not much space between the 100 day and 200 MA, price will go towards that 200 day MA quickly.
I also like to use the 8 and 21 day EMA’s on my daily charts. These exponential moving averages show more of the short term trend in the market on any timeframe and offer up entry points into existing or developing new trends. There is nothing wrong with using a 20 day or a 9 day average instead, I have just always used these 8/21 EMA’s as they are fibonacci numbers that tend to attract price on the short term. There are roughly 21 trading days in a calendar month also so its a handy amount of time to evaluate the short term trend.
As you can see below the daily chart of AAPL shows how a trend is well established when price is above all these key moving averages. The 50, 100, 200 simple MA’s are dashed thick lines showing the big picture trend. The 8 EMA is the thinner yellow line closer to price and the 21 EMA is the thicker cyan line showing more of the short term momentum of AAPL stock. Its pretty clear just from looking at this chart that when price falls below the 50 day MA and loses its short term trend it becomes more choppy and sideways, often going lower to “test” the 100 day or 200 day MA.
AAPL daily chart with 8/21 EMA and 50/100/200 SMA.
The TSLA example here shows how powerful a trend can be when all moving averages are stacked positive and sloping higher as the stock makes new all time highs like it did towards the end of 2020. TSLA spent the majority of late 2020 trading above its 21 EMA showing it was in a strong momentum trend and dips to its 8/21 EMA zone of support were buying opportunities. Once that 21 EMA broke in Feb 2021 and the 8/21 EMA crossed bearish to the downside it become clear the trend was shifting and it was a great idea to look for weakness down towards the 200 day MA in the coming months, which it then found support near and has since bounced from.
TSLA daily chart
The NVDA chart below is another example of why its more useful to focus on stocks above all their key moving averages I have outlined above. If price is above the 8/21 EMA and 50/100/200 SMA’s there is very little in the form of “baggage” or resistance above current prices to hold it down. When prices are clearly above it doesn’t mean they will explode higher but it provides the proper launching pad to form in a coiled base and potentially make explosive moves up to new highs.
NVDA daily chart
Stacked EMA’s using Fibonacci
Another way I sometimes like to utilize moving averages is to use a set of fibonacci based EMA’s. These are just exponential moving averages using the fibonacci number sequence starting with the 8/13/21 and adding the previous two numbers together to create the next. So the set of averages would be 8, 13, 21, 34, 55, 89, 144, 233. As you can see the 55 day EMA is close to the standard 50 day and the 233 day EMA is close to the 200 day but since everyone uses those basic random numbers these are fairly interesting and less copied. I have noticed numerous times how often price respects the 34 EMA and 55 EMA alot more precisely then the standard 50 day SMA within a longer term trend when most people don’t even know those levels exist. The chart of SPY below shows how these Fibonacci EMA’s look when they are all stacked positive and sloping higher.
Takeaways
As a shorter term trader I like to see the big picture trend that moving averages easily give me a visual of and then being able to filter down to stocks that are above or crossing over the 8 or 21 EMA is a great way to sort through many names very quickly to narrow my focus. These are just general ideas I like to use on a daily timeframe chart. When it comes to intraday charts on shorter timeframes like a 15 or 60 minute chart I like to use even less, usually just a 8 and 21 EMA to show me that short term momentum trend. Whatever you use its important to stay consistent and be systematic about what you are using the data for otherwise analysis paralysis becomes a issue.