Moving averages come in many different variations. SMAs and EMAs. SMAs are simple moving averages and are the most commonly used. EMAs are exponential moving averages and are less commonly used. The difference is that an SMA weighs each days data the same while the EMA weighs the most recent price activity more. Moving averages take an average price of the stock over a certain measured period of time. If the average price is moving up, the line moves upward and shows an up trend. If the average price is downward, then the line moves down and indicates a downtrend.



The most common periods are 10, 20, 50 and 200. The shorter periods (10 and 20) show in which direction the stock is trending in the short term. The longer term averages (50 and 200) show where the stock is trending in the longer term. When a stock is trading sideways, moving averages do no good. However, when the stock is obviously up or down, a moving average can point out a lot. A person looking to buy a stock might buy when the moving average is upward trending and buy closer to the moving average rather than further away from it. A person looking to sell a stock might sell when the moving average flattens out or turns downward. This is one basic tool used to help determine the trend direction of a stock. It shows where the momentum is going and where the higher probable trade lies.