Leavitt Brothers: Forget the Fundamentals

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	Simple Moving Average

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Simple Moving Average

A Simple Moving Average (SMA) is plotted as a line directly on a stock's price chart. It is the average value of the stock's closing price over a specified number of time intervals (i.e. the 50-day SMA is the average closing price over the previous 50 days on a daily chart, but on an hourly chart the 50-SMA would be the average closing price of the previous 50 hours).

Stocks have a tendency to either “ride” their moving averages or completely ignore them. If a stock tends to ride its MA, traders use the line as a buy or sell point.

That is a very simplified strategy and works great with some stocks, but offers no assistance with entries and exits with other stocks. The prudent trader needs to do some homework to see which MA's (if any) work best with a particular stock.

Some traders also like to plot two different moving averages (typically a longer-term line and a shorter-term line) on the same stock chart and use the crossing of the longer-term line by the shorter-term line to give buy and sell signals. But again, the prudent trader needs to play around with different MA's to see what works best for each stock and for his/her trading style.

ELP is an example of a weak stock in a steady downtrend whose 50-day moving average posed as resistance each time the stock bounced.

On the other side, LRW used it 50-day moving average as support on this 100% rally off its low.

Some traders will plot two different moving averages over a stock chart and use the cross of the longer term moving average by the shorter term MA for buy and sell signals. This type of strategy works well with gently rolling stocks that do not gap, and it worked fairly well with INTC (note this is a 30-minute charts). But don't try this with high beta volatile stocks because too many false signals are suggested.

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