The moving average is one of the most popular technical indicators among futures traders. Moving averages come in many forms, including exponential, smoothed, and simple. For anyone interested in becoming better acquainted with these powerful tools, focusing on the 20-, 50-, 100-, and 200-day period simple moving averages is a great place to begin.
In this blog post, we’ll explore the ins and outs of moving average trading using the ever-popular E-mini S&P 500 futures contract for illustrative purposes.
What Is a Moving Average?
A moving average is a technical tool that calculates the average of a select range of pricing data points. It is represented visually as a single line that’s plotted as an overlay to an existing price chart.
The simple moving average (SMA) is the most elementary of these indicators because no fancy mathematics are applied to enhance timeliness or accuracy. In reality, simple S&P 500 200-day moving averages are just that: the average values of a 200-day period sample of pricing values. The derivation for this indicator is as follows:
- Pn= Contract price at period n
- N = Number of total periods
- Simple moving average (SMA) = (P1 + P2 + … +Pn) ÷ N
Although the arithmetic behind the SMA is relatively basic, it is cumbersome. Fortunately, modern software trading platforms calculate moving averages automatically. All a trader must do is select the desired contract, period, periodic price point (high, low, mid, median), and moving average type, and then the physical computations are automated. For example, to derive E-mini S&P 500 200-day moving averages, enter the following information into your platform:
|Contract||E-mini S&P 500|
|Price Point||High, Low, Mid, or Median|
|MA Type||Simple, Exponential, Smoothed, or Weighted|
Perhaps the most significant advantage of using moving averages is flexibility. The indicator can be configured to include nearly any periodicity and price point of all futures products. Accordingly, you can apply moving averages to your favorite contracts, from the equities indices to ag products.
Moving Averages: Form and Functionality
Moving averages come in a multitude of varieties based on how each is calculated. However, no matter the type, moving averages are normally interpreted in several specific ways. Here are the key bits of information conveyed by a moving average:
- Trend confirmation or denial
- Identification of potential market reversal points
- Support and resistance levels for market entry or exit
- Recognition of popular chart patterns such as the golden cross or death cross
Although moving averages are very similar, they represent different data sets. For instance, the information disseminated by E-mini S&P 500 50-day period SMAs differs from that of E-mini S&P 500 200-day moving averages. Generally, the periodicity of each renders a unique interpretation of data:
- Shorter periods: Shorter-period moving averages have a faster response time, giving a better representation of current price action. These tools are ideal for intraday and day trading strategies.
- Longer periods: Longer-period moving averages have a slower response time, providing a superior evaluation of macro price action. These tools are great for long-term trend-following or market-reversal trading and investment strategies.
To get the most out of any moving average, it is essential to align your periodicity to your trading strategy. If you’re a swing trader or longer-term investor, then 50-, 100-, or 200-day moving averages will carry more relevance than 50-, 100-, or 200-minute moving averages. Ultimately, it’s your responsibility to find which indicators work best for your trading strategy.
Interested in Learning How to Trade E-mini S&P 500 200-Day Moving Averages?
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