Moving averages have been a mainstay in my toolkit since I began my professional trading career in 1999.
Moving averages help me determine:
- How aggressive to be with my portfolio
- Which stocks I want to be long or short
- Just how strong the current market trend is
- What news matters, and what doesn’t
In terms of importance, I rate moving averages above news, economic data, earnings, and just about any indicator you can think of.
If I was a beginning trader looking to build my net worth, moving averages would be my #1 focus.
And through a series of helpful case studies, you’re about to learn:
- What a moving average Is
- How moving averages are calculated
- The specific moving averages I use, and how I interpret them
- The biggest myth of moving averages
What Is a Moving Average? How Are They Calculated?
Let’s talk about how a moving average is calculated.
A moving average is a stock’s average price over a certain time period.
We’re going to focus on the daily time frame this article.
A daily moving average is the average of a stock’s daily closing prices over a specified number of days.
(a weekly moving average would be the average of a stock’s weekly closing prices over a specified number of weeks)
For example, the 50 day moving average is a stock’s average closing price for the last 50 days.
Every day, the newest closing price in the moving average replaces the oldest, which is why we call it ‘moving’ — a moving average change every day.
Here’s a simple chart of Apple (AAPL) with its 50 day moving average.
The Biggest Myth About Moving Averages
You may hear people say things like “moving averages don’t work” or “everyone sees the same moving averages, so they have no value”
But here’s the reality: most serious technician understand that a moving average is not the same as a trading strategy or even signal.
I don’t buy and sell purely because of a moving average.
But moving averages do help me make decisions. They’re one piece of the puzzle.
That’s why they’re so valuable to me.
Simple vs. Exponential Moving Averages
There are 2 types of moving averages — simple and exponential.
They are calculated in slightly different ways.
A simple moving average is a straight average of the stock price.
An exponential moving average gives recent prices a bigger weight, so it does a better job of measuring recent momentum.
Here’s Nvidia (NVDA) with its 50 day simple (blue) and exponential (pink) moving averages.
You can see they’re pretty close, but the exponential (pink) is a bit closer to the current price.