OTCPicks Penny Stock Blog

A fundamental skill of trading penny stocks successfully is picking up on trends amidst day to day price action, and moving averages are a vital tool in this task. When used correctly, moving averages smooth out charts and clarify what a stock is doing over time. Additionally, moving averages act as an indicator for good buy and sell opportunities.

Subscribe To Our Exclusive Penny Stock Alert Service - Click Here

First of all, it is important to understand what a moving average is and how it is calculated. The data comes from an average of a certain number of prior days’ prices, and that set of days shifts forward with time. This means that a fifty day moving average, for instance, averages days 1-50 for the first plot point, then days 2-51 for the second, and on like that for the duration of the chart. Compared to a daily price chart, the moving average is much smoother, only showing trends and not all the peaks and valleys of daily volatility.

The longer the period of days in the average, the smoother the chart will be. However, shorter moving averages more accurately reflect the short term trends. Some typical moving averages are 15, 20, 30, 50, 100, and 200 days.

Moving Averages as Trade Indicators

To use moving averages as signals to enter or exit a position, chart a moving average on the same graph as either a shorter moving average or with the regular stock price chart. Look for the stock price or shorter term moving average to cross the line of the longer moving average from lower to higher. This is a buy signal, also known as a golden cross. The opposite, when the stock or shorter moving average dips below the longer one, it is a sell indicator or a dead cross.

Note that this strategy should only be used when the moving average is clearly trending and not when it is flat. Crosses of a flat moving average are not accurate and should not be relied on. To be extra cautious, look for a cross to hold for a few days before making the trade.

Subscribe To Our Exclusive Penny Stock Alert Service - Click Here

Types of Moving Averages

A basic moving average that calculates all days in the date range in the same is known as a simple moving average, while an exponential moving average or EMA weighs the more recent days in the range more heavily.

The extra weight on recent days in EMAs can work to reflect developing trends faster than SMAs. However, EMAs are more susceptible to respond to random noise in the short term and indicate a trend that is not actually developing. Traders often use both types together to double check trends they believe are developing.

The proper type and date range to use will depend on the trading strategy and industry involved. Penny stock traders have been successful with many systems, but the basics of moving averages are a constant. With practice using them, investors become better and better at noticing trades, and this only helps their bottom line.

In the comping weeks OTCPicks.com will continue in-depth coverage of all the indicators a penny stock investor must know. Bookmark us or subscribe to our penny stock alerts today.