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Moving Average Stock Indicator: Types, & How to Use It

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Written by Timothy Sykes
Updated 4/18/2022 15 min read

The moving average is one of the most popular stock indicators out there. Traders like it because it’s versatile. And it can show you important things about the market.

It can help you to clearly see support and resistance levels. It can also be good for seeing how a stock is trending.

I like this indicator. But like most technical indicators, I don’t rely on it alone. It’s one piece of the puzzle you need to figure out every time you make a trade.

Learning about technical indicators, like the moving average, is one way you can build your knowledge base. So let’s get into it.

What Is Moving Average (MA)?

Moving average has a simple meaning … It’s a way to chart daily price points over a period of time.

It uses a stock’s daily closing price as a data point. This is averaged out over a set period.

These time periods used to be somewhat standardized. But modern charting software makes it easy. Now you can fill in any variables you want.

As new price points are plotted on a stock’s chart, the last number in the moving average changes. This will move the trendline.

Short-term moving averages will stick closer to the latest price than long-term ones. But long-term traders trust in the value shown by longer-term moving averages.

Is Moving Average a Good Indicator?

is moving average a good indicator
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The moving average is a foundational stock indicator. It has widespread use among more technical traders.

And it’s influential, too. Bollinger Bands®, the MACD, and the McClellan Oscillator all use it.

 I like moving averages for a few reasons. First off, they’re really good at doing the thing they’re designed for. They chart price action cleanly without noise and choppiness. This can be helpful when you’re dealing with high volatility stocks like the ones I trade.

(If you don’t know why volatility is a good thing, I built my no-cost ”Volatility Survival Guide” for traders like you.)

The smooth line you get with moving averages can also be helpful. It can show a stock’s support and resistance levels over a longer timeframe. That’s valuable for your trading plan.

It can help you — if you use it right. In my mind, that’s enough for the moving average to qualify as a ‘good’ stock indicator. The bad side comes out of misuse.

Many traders use moving averages to identify price trends. And they’re actually great for that. If the price crosses the moving average line on its way up, the stock is in an uptrend. If it crosses as it goes down? You guessed it … downtrend.

The problem here is that some people look at these trends as an indicator of future movement. In reality, the moving average is a trend-following indicator. The price moves first, and the moving average moves second.

 If you’re depending too much on moving average, you’ll always be behind.

The Types of Moving Averages with Examples

Here’s the part you can spend your life on — which formula works for you?

Some stock geeks have spent their careers fine-tuning the moving average. But traders use three basic ones the most:

  • Simple moving average (SMA)
  • Exponential moving average (EMA)
  • Weighted moving average (WMA)

The differences among these three lie in the importance given to the most recent data points…

Simple moving averages treat all data points as equal. Exponential moving averages give increasingly more importance to recent data points. Weighted moving averages also put greater focus on recent data but in a more even way.

Some people call moving averages ‘rolling averages’ or ‘trailing averages.’ Let’s keep it simple and use moving average.

Simple Moving Average (SMA) + Example

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A simple moving average takes an average of the data points specified.

For example, a nine-day SMA takes the average of the last nine days of a stock’s price. It changes each day — it ‘moves.’ It gives you a picture of a stock’s recent price action, along with some perspective on its trading value.

But this isn’t the way people use moving averages on modern charting software. These days, a moving average samples periods instead of days.

If you’re looking at a one-year chart with daily candles, your nine-period SMA could be a nine-day SMA.

moving average stock fcel 1 month chart
FuelCell Energy Inc (NASDAQ: FCEL) 1-month chart, 9-day SMA — courtesy of StocksToTrade.com

But if you’re looking at a one-day chart with one-minute candles, your nine-period SMA will be a nine-minute SMA. See how much closer it sticks to price action?

moving average stock fcel 1 day 9 sma
FuelCell Energy Inc (NASDAQ: FCEL) 1-day chart, 9-minute SMA — courtesy of StocksToTrade.com

Make sense? I know, it’s a bit of math.

Exponential Moving Average (EMA) + Example

An exponential moving average gives your moving average more of a recency bias. This is good in some cases — after all, you’re looking to trade now, not nine days ago. But it carries the danger of giving off false signals.

EMAs use a multiplier to prioritize more recent periods. This is one of the interventions used to make it lag a little less.

Look at the one-month chart below to see how it reflects extreme price moves a bit more faithfully.

moving average stock fcel 1 month 9 day ema
FuelCell Energy Inc (NASDAQ: FCEL) 1-month chart, 9-day EMA — courtesy of StocksToTrade.com

Simple vs. Exponential: Which Moving Average Is Best?

Forgive the pun … but this isn’t a simple question.

Like I said before, there are a few reasons you might want to use a moving average in the first place.

Determining price trend is more of a proactive reason. Moving averages smooth out a stock’s highs and lows. This can give you a more accurate depiction of a stock’s trending direction.

If you use a simple moving average here, you risk missing out on a stock that pops. But an exponential moving average could mislead you about the stock’s longer-term direction.

supernova placement

Long-term directions matter less to day traders like me than to longer-term traders. But a stock’s history still matters.

If a stock hits a 52-week high, that could be a sign of a breakout. But if it’s regaining levels it last hit a year and a half ago, that might mean a big sell-off is in its immediate future.

You can also use this indicator for support and resistance.

Simple moving averages will show a better picture of historical support and resistance.

That’s great for certain stocks, less so for others. If you’re trading a volatile stock, you might want to use exponential moving averages instead. Since they’re more reactive to highs and lows, they might give you a better impression of what the market is doing.

How Do You Calculate a Moving Average?

how to calculate moving average
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Before modern trading software, it was much harder to calculate moving averages. They didn’t publish to-the-minute stock prices in the daily newspaper.

Now traders can use moving averages more easily. Just make sure you have a trading platform that’s up to the task.

The one I use is StocksToTrade. StocksToTrade has all the things that I found missing in other trading platforms. That’s because I helped design it, with a trader’s needs in mind. (Full disclosure: I’m also an investor in it.)

For me, StocksToTrade makes it easy to deploy moving averages on a stock chart. You can play with the intervals. The product is clean, so you can see what your chart is telling you.

Here’s what else I like about StocksToTrade:

  • The platform comes loaded with a variety of built-in and easy-to-customize stock screeners. This lets you plug in exactly what you’re looking for in potential trades.
  • Its news scanner picks up on press releases, tweets, SEC Commission filings, news articles, and more. And the Breaking News Chat gives you the news that matters.
  • I think its charting is easy, intuitive, and looks good.

Try it here —get a 14-day trial for only $7. Or get it with the game-changing Breaking News Chat add-on for $17.

Moving Average Formula

You’re the type who likes to do your own work? I can appreciate that.

Here’s a 10-day simple moving average. Add all the days together, and then divide the total by the number of days.

It looks like this: (Day 1 + Day 2 + …  Day 9 + Day 10) ÷ 10 = SMA.

An exponential moving average is A LOT more complicated. Here’s the basic idea…

(Today’s price) × [2 ÷ (Number of days) + 1] + (Yesterday’s EMA) × {1 − [2 ÷ (Number of days) + 1]} = Today’s EMA

OK, now let’s never do that again.

How You Can Use Moving Average to Trade Stocks: 3 Top Crossover Strategies

how to use the moving average to trade stocks
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You know how I always tell you to keep it simple? Well, let’s get a little deeper here.

Moving averages matter for the same reason any indicator worth its salt does. People believe in them.

Here’s a hypothetical setup: A stock’s nine-day EMA makes a strong upward move across the 20-day EMA. Many traders believe this signals a future breakout.

Why do I care about this pattern? It does say a lot about a stock’s recent performance. But mostly I care because other traders care.

The market is a game of cat-and-mouse played by people who all think they’re the cat. Most traders think they’re going to catch the mouse and get a nice dinner.

I want you to be the mouse. We all know how those old cartoons played out. Let the cat chase after things while you tie its tail to the dog.

I’m not outlining these indicators because I want you to base your trades on them. I want you to react to what the market thinks of them.

If you want to beat the cat at its own game, but learn how to think like it first.

Crossovers Are a Trading Signal

This is the most popular moving average strategy.

There are a lot of traders using this setup. Particularly on longer-term charts. A short-term moving average crossing a longer-term one can be a sign of momentum.

If the short-term moving average crosses upwards, a lot of traders see it as a bullish signal. When it makes a clear cross downward, it’s seen as bearish. When the lines bounce off each other, it signals a continuation of the trend.

Here’s a look at FCEL’s one-month chart. If you’re a swing trader, trading crossovers here could have helped you.

moving average stock fcel 1 month crossover
FuelCell Energy Inc (NASDAQ: FCEL) 1-month chart, bullish crossovers in green, bearish in red, bounces in yellow — courtesy of StocksToTrade.com

Be Careful Day Trading Crossovers

This is the part where I tell you to be cautious. No indicator can guarantee future price movement.

When you’re day trading volatile stocks, crossovers can be misleading. Let me show you a typical day of confusing signals.

moving average stock fcel 1 day crossover
FuelCell Energy Inc (NASDAQ: FCEL) 1-day chart, bullish crossovers in green, bearish in red, bounces in yellow — courtesy of StocksToTrade.com

If you traded on these crossovers, you might have done all right … but you’d have been a step behind the market.

The Market Believes in Them

There’s a lot you can do with moving averages. And there are a lot of traders using them for different reasons.

Some use crossovers as a trading signal. Some use longer-term moving averages to determine support and resistance levels.

Because so many traders use this indicator, it can tell you something about a stock’s future. You just need to understand that it tells you more about traders than about the stock itself.

The Bottom Line on Moving Average

the bottom line about moving average
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The moving average stock indicator is one tool you can use in your pursuit of trading consistency. And I want you to learn it by heart.

Surgeons don’t focus on the tools they use. The tools just help them achieve their real goals. That’s what you need to do.

This is one step on the way to becoming a consistent trader. If you want to commit to this path, apply to my Trading Challenge.

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I don’t accept just anybody. But if you want to succeed badly enough to put in the work, apply. You’ll get 6,000 video lessons, live trading webinars, and an awesome community of traders … if you’re ready to work and are accepted.

 So keep grinding in your knowledge pursuit. I want you to forget more than other traders know.

How do you feel about moving averages? Do you use them in your trades? Let me know in the comments — I love hearing from readers!

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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”