What are moving averages?

A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random short-term price fluctuations. It is a trend-following, or lagging, indicator because it is based on past prices.

https://www.investopedia.com/terms/m/movingaverage.asp

The two most widely used moving averages are Simple and Exponential.

A simple moving average (SMA) is an arithmetic moving average calculated by adding recent closing prices and then dividing that by the number of time periods in the calculation average. A simple, or arithmetic, moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by that same number of periods. Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react.

https://www.investopedia.com/terms/s/sma.asp

The exponential moving average (EMA) is a weighted moving average (WMA) that gives more weighting, or importance, to recent price data than the simple moving average (SMA) does. The EMA responds more quickly to recent price changes than the SMA. The formula for calculating the EMA just involves using a multiplier and starting with the SMA.

Now that we understand what moving averages are lets talk about what ones we should be using.

I am a firm believer in keeping it simple stupid. There are zero reasons to have a million indicators on your charts because a wise man once told me all indicators are probably right its how you use them that matters. Blindly staring at 20 indicators is not only going to confuse you but do you really feel other traders are looking at the same indicators you are? If we are trading momentum stocks we want to see what the algorithms, institutional traders and other retail traders are seeing. For example if every one else is watching the 200sma for resistance and you’re watching the 152ema you might go short too soon. Keeping it simple means not over thinking it trying to create a crazy strategy based on random indicators that no one in their right mind would use.

So what moving averages do most momentum traders use?

When looking for support and resistance based on moving averages it is best to use the 100 and 200sma on the daily charts. These are highly respected on mid/large cap stocks where there is a lot of algorithmic and institutional trading.