Which Moving Average System Is Right For You?

Learning a good moving average system is a valuable asset for any technical investor.

They are so useful that even fundamental investors often use them.

Because of their usefulness, many different oscillators use them in their formula.

EMAs VS SMAs

There are a few different types of moving averages. The two most common ones are the standard moving average and the exponential moving average.

Standard moving averages (SMA) simply take the closing price for however many days. Then average them all out.

Since every day you will get a new closing price, the average will be different every day. The average for the day is then plotted in the form of a line.

Simple to understand, right?

Exponential moving averages (EMA) are not much different. The only difference is that they weigh the more recent days more heavily, to give a more accurate representation of what the stock is doing.

How Many Moving Averages Should I Use?

There is no simple answer to this. Whatever moving average system suites you, suites you.

Moving averages are pretty simple to understand. Thus they make a great first technical indicator to work with if you are just getting started.

You can use either one, two, or three moving averages at a time. Each set has it's own moving average system.

I will go over them now and hopefully by the end, you will find a combination that works for you.

One Moving Average

At least one moving average is good to have open on your chart at all times.

If you only prefer to have one, you can determine the general trend of the stock.

The most common moving averages are 50 day, 100 day, and 200 day. These are usually used in conjunction with one another. However, you can use only one if you prefer.

A general rule:

If you are a short-term trader you will want to use a short-term moving average. And if you are a long-term trader you will want to use a long-term moving average for you're moving average system.

One moving average doesn't give you much. It is mainly just to tell the general direction of the trend.

The other way that one moving average is used by investors is to signal the start of a new trend. When the stock moves over the moving average, a new trend may be starting.

So, if this is all you are looking for, great.

Two Moving Averages

You can also use two moving averages at a time.

The signal for this moving average system is pretty simple to understand. You get one more advantage that when you use two. But, as I said before, two is not better than one.

Since you are relying on the shorter moving average to cross over the longer as an indicator, instead of the price crossing over (as with one moving average), you don't get as many false signals.

Three Moving Averages

Finally, if you do want to work with three different moving averages all at one time, you will have an extra indicator at you're disposal. Yay!

The firs moving average crossover will act as a warning sign. The next one will be a trade signal.

Lets say you use the 9, 18, and 24 day moving averages. When the short-term moving average (9 day) crosses over the medium-term (18 day) you have an early warning sign of a new trend. But, if the middle-term (18 day) crosses above the long-term (24 day), it is signaling that the new trend is about to start.

Don't Rely Too Heavily On Moving Averages

Moving averages are just one of the many tools that you should be using while researching stocks.

They can be a valuable asset. But, as with any technical indicator, its always best to have a few other oscillators open at the same time.