There are millions of trading indicators that investors and traders can use to strategize and forecast market moves. We’ll focus on four we consider most helpful. (There is only one that we really understand.) The use of charts (also deemed technical analysis) and the mastery of colorful lines, which help optimize the leverage of technical indicators, are mission-critical; this is why we don’t use them here. But learn how to draw and paint if you have to.
PRICE MOVING AVERAGES
The simple moving average (SMA) is calculated by taking the average closing price of the past N sessions. For some reason, many people calculate the SMA based on N equal to 50 or 200. It is just the way it is. Sort of an act of God… Of course, the SMA is easy to compute and thus quite popular amongst traders and investors who… can’t do complex mathematics.
Is the price of the share above or below the SMA?
The answer helps assess market sentiment. If the price is above the SMA, you have a bullish scenario; if it is languishing below the SMA, it’s bearish. The slope of the SMA is also illuminating; we mean it shines. If the SMA line is sloping up, the market is considered bullish; if the slope trends down, it’s bearish.
Many traders see the moving average as a line of support or resistance. For example, they’ll consider buying a stock if after a strong run the share consolidates and finds support at the SMA line. If however it violates support at the SMA line in high trading volume, the move is considered bearish. When the price of shares evolves below the SMA, the SMA line may act as a line of resistance.
Let’s start complicating matters because we enjoy it so much! The Exponential Moving Average (EMA) is a weighted average closing price of the past N bars. To compute the EMA value, the trader gives a higher weight to the most recent values. The EMA is thus more responsive to recent market prices and tends to produce more buy/sell signals; however, the more signals, the less reliable each signal becomes. We don’t know what exponential means, so we don’t use the EMA. It’s your call if you want to complicate things…
=> Trading Oscillators – The Stochastic Indicator
PRICE MOVING AVERAGES
The simple moving average (SMA) is calculated by taking the average closing price of the past N sessions. For some reason, many people calculate the SMA based on N equal to 50 or 200. It is just the way it is. Sort of an act of God… Of course, the SMA is easy to compute and thus quite popular amongst traders and investors who… can’t do complex mathematics.
| Image source: google.com |
Is the price of the share above or below the SMA?
The answer helps assess market sentiment. If the price is above the SMA, you have a bullish scenario; if it is languishing below the SMA, it’s bearish. The slope of the SMA is also illuminating; we mean it shines. If the SMA line is sloping up, the market is considered bullish; if the slope trends down, it’s bearish.
| Image source: google.com |
Many traders see the moving average as a line of support or resistance. For example, they’ll consider buying a stock if after a strong run the share consolidates and finds support at the SMA line. If however it violates support at the SMA line in high trading volume, the move is considered bearish. When the price of shares evolves below the SMA, the SMA line may act as a line of resistance.
| Image source: google.com |
Let’s start complicating matters because we enjoy it so much! The Exponential Moving Average (EMA) is a weighted average closing price of the past N bars. To compute the EMA value, the trader gives a higher weight to the most recent values. The EMA is thus more responsive to recent market prices and tends to produce more buy/sell signals; however, the more signals, the less reliable each signal becomes. We don’t know what exponential means, so we don’t use the EMA. It’s your call if you want to complicate things…
| Image source: google.com |
=> Trading Oscillators – The Stochastic Indicator
