Moving averages are my blueprint for nearly every decision I make as a trader.

I believe they’re a gift to use because they simplify the chaos of daily price action and turn it into something you can actually interpret and act on. There are tons of different indicators you can use but at the end of the day, none are as reliable as moving averages.

They especially amplify buying and selling decisions whether you’re a short term trader, swing trader, position trader, or even a long-term investor. They can help you understand a few different things. If buyers or sellers are in control, if a pullback is healthy or a break of trend, whether a breakout is too extended, whether or not a stock will pull back again, and whether or not a trend in either direction is strengthening or losing steam. I want to be in stocks that are “surfing” their moving averages.

Moving averages can be a powerful tool but they’re only helpful if you understand how to use them properly.

My personal moving average setup is the daily 10/20 EMA and the daily 50/200 SMA.

I like the 10/20 EMA because they move quickly and give me a clear read on shorter-medium term momentum and trend strength. They react fast enough to show character changes early which helps me with timing entries, managing risk, selling, or spotting when the trend is starting to weaken to the upside or downside.

I like the 50/200 SMA because they represent the bigger picture. Institutions watch these levels closely and they tend to act as major support or resistance in longer term trends. When a stock trades above rising 50 and 200 SMAs, it signals that the broader trend is healthy, and when it falls below them, it tells me the longer term structure is likely broken and down. Together these four averages give me a complete view of both the shorter-medium term momentum and the longer term foundation of the move. I believe all four moving averages can present buying opportunities depending on the stock, moving average, etc.

What’s the difference between the EMA and SMA? An EMA reacts more quickly to price changes because it gives greater weight to recent data, while an SMA smooths the trend by weighting all past prices equally. That’s why I want my shorter term moving averages to be EMAs and my longer term moving averages to be SMAs.

Here’s how I view them:

• 10 EMA: Entry/exit for high momentum trends where buyers/sellers are proving to step in aggressively.

• 20 EMA: Entry/exit in in steady, healthy, sustainable uptrends.

• 50 SMA: Good spot in mature trends that is popular among institutions.

• 200 SMA: Major long term level especially for institutions and big money funds.

On my charts, the 10 EMA is blue, the 20 EMA is purple, the 50 SMA is yellow, and the 200 SMA is red. No reason, just what I’ve always used and am used to.

Algorithms play a huge role in why these levels matter so much. A large share of daily trading volume is driven by automated systems that react to predefined signals, and moving averages are among the most common triggers built into those models.

When price approaches the 10 or 20 EMA during a strong trend, algorithms often step in first and absorb supply which leads to controlled bounces. The same thing happens around the 50 and 200 SMA, but on a much larger scale. Institutions program their models to buy strength above those long-term averages and reduce exposure when price slips below them. These automated reactions also create self reinforcing behavior. The more algorithms respond to these levels, the more important they become. It’s somewhat of a self fulfilling prophecy, you could actually argue all moving averages are self fulfilling prophecies… if tens of thousands of traders and algorithms are watching the same exact moving averages and have buy/sell orders at these moving averages, there is likely to be more action in those areas. This is why you often see clean rebounds right at key moving averages in strong markets… they’re basically mechanical decision points used across the industry which is why understanding them gives you an advantage.

The strongest stocks are almost always above the 50 & 200 SMA. Then you can use the 10 & 20 EMAs understand the trend strength. The 10 EMA reflects fast momentum, when a stock consistently trades above it that’s a clearly shows strong demand. The 20 EMA reflects the slower, medium term, more controlled trend. When a stock respects this level, it shows the move is still healthy but not moving with the same escape velocity as if it was just riding the 10 EMA. The behavior around these two EMAs helps you understand the character of the trend.