In previous lessons, I have mentioned that many traders rely entirely on technical charting patterns to get in and out of trades. The first technical study I introduced to you was, Bandz a Make Stocks Dance, in which I explained the Bollinger Band study. In today’s article, I’m going to be explaining the Simple Moving Average and how it can help you predict the future price movement of a stock.
What is SMA? (Simple Moving Average)
SMA is calculated by adding the closing price of a stock for a certain number of time periods and then dividing this total by the number of time periods. For instance, if you had a 50 day SMA on DISNEY then it would be calculated by adding the closing price of Disney for the past 50 days all together and then dividing by 50. Very simple but adding the SMA to your technical charts can be very beneficial.
The two most common SMA’s to add are the 50 day and 200 day. When a stock’s price moves above one of these averages it is said to be bullish and we can see a continual rise in the short-term future. When a stock’s price moves below one of these averages it is said to be bearish and we can see a downturn in the stock in the short-term.
Adding SMA to your charts
Adding SMA to your charts should be very simple with whatever trading platform you are using. I’m going to show you how to add SMA with Schwab’s Streetsmart edge so you get a better idea.
Studies>View all Studies
+Simple Moving Average> Period 50 or 200
Two Popular Patterns
The Death Cross occurs when the 50 day SMA (Blue Line) crosses BELOW the 200 day SMA (Yellow Line). This is an extremely bearish signal and further decline in the stock’s price is expected.
Notice the drop in share price!
The Golden Cross occurs when the 50 day SMA crosses ABOVE the 200 day SMA. This is an extremely bullish signal and further upward movement in the stock’s price is expected.
Homework: Go on your trading platform and see how you can add the 50 and 200 day SMA’s to your charts. Look through multiple charts and see if you can find a recent death cross or golden cross.