If the stock is trading below an uptrending moving average, it’s still an uptrend, but it might be weakening. If the security is above the moving average and the moving average is going up, it’s an indication of an uptrend. The SMA gives equal weighting to each time period, which makes it well suited for identifying longer-term trends. The periods used for the calculation could be anything from minutes to years. Two of the more common types of moving averages are the simple moving average (SMA) and exponential moving average (EMA).Īn SMA is calculated by totaling the closing price of a security over a set period and then dividing that total by the number of time periods.įor example, the calculation for a 10-period SMA would be: And not all moving averages are created equal. Moving AveragesĪ moving average is one of the more popular ways to identify a trend, but there are different types. Three of the more popular ones are moving averages, moving average convergence divergence (MACD), and Parabolic SAR. The nice thing is there are many indicators you can use to identify possible trends, such as linear regression, price envelopes, ADX, and Keltner channels. Trends occur across all different time frames, and it’s often said the earlier you spot a trend, the more opportunity you may have to capitalize on it.
In that 100-year period, there have been numerous uptrends and downtrends some lasting years and even decades. Pull up a chart of the Dow Jones Industrial Average ($DJI) for the last 100 years and it’s easy to spot the overriding trend-up-but that’s not necessarily going to help you trade or manage your portfolio. The trend is your friend until the end when it bends.īut how do you find the trend in the first place?.Trend identification is so popular that there are many sayings related to trends, such as: Traders like to catch these changing prices hoping to ride them out, regardless of whether they’re short- or long-lived. And for good reason: Prices are constantly changing sometimes very quickly. Many traders, especially those using technical analysis in their trading, often focus on trends.
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