If the price goes below the green, the stock is sold and we have our profit. Generally, that will automatically lock in our gains. It gives us a moving stop loss, and if we have a stop loss in the market, then we should move it according to this line. This is a very useful line, as it shows us when to get out of the trade. The next average, SMA 40, the 40 day average, I usually make green. For example, when the trend is up and the price is above the red line, I look at opening a long trade, buying the stock. The trade will be long or short, depending on the trend.

The shortest term average I use, SMA 20, which I like to colour red, is the signal to open a trade. The principle is that when a line or price crosses another line, which is a definite and unambiguous signal, we can relate it to a particular action that we want to take. You always need to remember the use of all these lines, so we’ll go over it now. It’s unusual to see anything other than a day used in this context, though. The number after the average is how many days (or time periods, if you’re using something other than a day) are averaged. Actually, there are some other types, but I won’t bother to explain them here, as these are all we need for our trading. If you remember, there are two types of moving average – the simple moving average (SMA) which is just an ordinary average as we know them, and an expo-nential moving average (EMA) which adds more significance to recent data (makes it closer to the current value). They are called moving averages, as they move each day – the oldest value is dropped off, and the newest picked up, to go towards today’s moving average.

You should know what moving averages are from your previous studying, but if you don’t, they are the average value of the last so many days of values, and they smooth the prices out so that you can see better which way and how much they are moving.

200 ema vs 200 ma