When it comes to technical analysis, it’s very easy to become overwhelmed. Everything from Bollinger Bands and MACD, to Williams’ %R and accumulation/distribution lines can get a bit confusing. However, there is one simple technical tool that’s very easy for traders to spot and use.
The Simple Moving Average (SMA)
The SMA is often used to determine direction of an asset.
If the SMA is moving up, the trend is up. If it’s moving down, the trend is down. That’s one way to utilize them. We can also look at price-crossing. When the price of as asset drops below the SMA, it can be an indication of potential downside.
When the price of an asset moves above the SMA, it can be an indication of potential upside.
The 200-day MA is the proxy for the long-term trend.
The 50-day MA is used to measure the intermediate trend. And shorter-term SMAs, such as the 20-day can be used to measure short-term trends.
A third way is to look for crossovers of moving averages
Many traders watch the 20-day, 50-day and 200-day moving averages the most.
They can provide us with lines of support and resistance, and let us know when to expect a potential reversal.
There are two key crossovers to watch
The first is known as the “death cross,” which can indicate potential downturn. In short, it’s an indication of death of prior trend. These can be spotted when the short-term moving average drops below the long-term moving average.
For example, if the 50-day moving average drops below the 200-day, it’s a death cross.
The other is the “golden cross,” which can indicate potential upside after a downturn. This one can be spotted when the long-term moving average crosses above the short-term moving average. For example, if the 200-day crosses above the 50-day, it’s a golden cross.
Of course, these are lagging indicators. But that’s why it’s important to always confirm your findings with other technical indicators. These can include Bollinger Bands, MACD, relative strength (RSI), Money Flow (MFI) and Williams’ %R.
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