Course Progress
Part of 5 Chapters
Moving Averages and Trends: Riding the Inertia
Chapter 2. Moving Averages and Trends: Riding the Inertia
If candlesticks represent the “Battle of the Moment,” then ==Moving Averages (MA)== represent the “Direction of the War.” Moving averages smooth out price data to create a single flowing line, making it easier to identify the trend without being distracted by day-to-day noise.
1. SMA vs. EMA: Speed Matters
There are several ways to calculate an average, and each provides a different perspective on the market.
Comparison of Moving Averages
| Type | Calculation | Characteristics | Best Used For |
|---|---|---|---|
| **Simple (SMA)** | Arithmetic mean of past prices | Slower to react; reflects long-term balance | Identifying major support/resistance levels |
| **Exponential (EMA)** | Weights recent prices more heavily | Faster to react; sensitive to sudden changes | Short-term momentum and swing trading |
2. Deciphering the Trend
Technical analysis is essentially ==“Trend Following.”== We want to buy when the trend is up and sell (or stay out) when the trend is down.
Price remains consistently above a rising 50-day EMA
Price temporarily drops to touch the EMA line without breaking it
Price bounces off the EMA, creating a 'Higher Low'
The trend remains intact as long as the EMA direction is upward
3. The Signal: Golden Cross & Death Cross
When two moving averages of different speeds intersect, it often signals a major shift in the market’s mood.
- Golden Cross: A short-term MA (e.g., 50-day) crosses above a long-term MA (e.g., 200-day). This is a strong ==Bullish== signal indicating long-term upward momentum.
- Death Cross: A short-term MA crosses below a long-term MA. This is a strong ==Bearish== signal indicating a transition into a downtrend.
The Lagging Nature: MAs are “Lagging Indicators.” They tell you what has happened, not what will happen. Using them in a sideways (ranging) market can result in many “Whipsaws” (false signals).
4. Conclusion: The Path of Least Resistance
Moving averages are not predictors; they are filters. They show you the ==“Path of Least Resistance.”== By aligning your trades with the direction of the MA, you ensure that you are swimming with the current, not against it.
📚 Prof. Sean’s Selected Library
- [Technical Analysis Explained] - Martin Pring: A deep dive into moving average strategies and trend strength.
- [Come Into My Trading Room] - Alexander Elder: Explains how to use multiple timeframes and MAs together.
- [Moving Averages 101] - Steve Burns: A concise guide for beginners focusing on practical entry and exit rules.
Next time, we will explore ‘Support and Resistance’—learning how to identify the invisible floor and ceiling of the market.