The easiest of the all the technical indicators to follow is the moving average.  There are two types of commonly used moving averages when you first begin to learn stocks.  The first is the simple moving average (SMA) which “simply” averages all of the closing prices for the last number of days.  The other option is the exponential moving average (EMA) which averages over a given number of days but gives more weight to the recent prices versus the older prices.  For most cases either moving average will work fine, but play with both of them to determine which style works best for your trading style.

How To Use Moving Averages

Moving averages are used for levels of support and resistance on the price movement of any equity.  Generally you track a short, medium, and long term moving average.  The most common timeframes for these averages is 20 day for the short, 50 day for the medium, and 200 day for the long.  If you are listening to a stock market 101 show on the radio they will generally refer to these moving averages.  However, your trading strategy and stocks that you like to follow may tend to land on slightly different moving averages so tweak with the number of days averaged to find what works best for you.  Then use these points to determine where to set your stop losses and buy in points on the stocks you are following.

Crossovers

If a short term moving average crosses a longer term moving average than you can expect a change in the general direction of the stock.  I generally wouldn’t bet against a cross over, but simply not trade at all or wait until the moving averages cross over each other again in the direction you want to trade.  The 50 day crossing the 200 day is a very powerful sign that the current price trend has ended.

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