HOLLOW POINT TRADING
What Are Moving Averages?
A moving average smooths out price data by calculating the average price over a specific number of periods. As each new period closes, the oldest data point drops off and the newest one is added, causing the average to "move" across the chart.
Moving averages help traders filter out noise and identify the underlying trend. They're among the most versatile tools in technical analysis.
Primary Uses
- Trend Identification: Determine if a market is trending up, down, or sideways
- Support & Resistance: Price often bounces off key moving averages
- Signal Generation: Crossovers provide entry and exit signals
Types of Moving Averages
Simple Moving Average (SMA)
Calculates the arithmetic mean of prices. Each data point has equal weight.
Best for: Long-term trend analysis
Exponential Moving Average (EMA)
Applies more weight to recent prices, making it more responsive to new information.
Best for: Short-term trading, catching trends early
| Type | Responsiveness | Best Use |
|---|---|---|
| SMA | Slowest | Long-term trends |
| EMA | Fastest | Short-term signals |
| WMA | Moderate | Balanced approach |
Common Periods
Most Watched Moving Averages
- 9 EMA: Very short-term momentum
- 20 EMA/SMA: Short-term trend
- 50 SMA: Medium-term, institutional level
- 200 SMA: Long-term trend, bull/bear market divider
Crossover Signals
📈 Golden Cross
50-day MA crosses ABOVE 200-day MA. Signals potential shift to bullish trend.
📉 Death Cross
50-day MA crosses BELOW 200-day MA. Signals potential shift to bearish trend.
Limitations
They Lag
Moving averages are based on past prices, so they always lag current price action.
Whipsaws
In choppy markets, price frequently crosses MAs generating false signals.
Key Takeaways
Moving averages are foundational tools that help identify trends and generate signals. The best MA is the one that fits your trading style. Experiment, use proper risk management, and combine with other analysis tools.