Stock trading is always a risky business and all the more so because of the abundance of high frequency trading and the lack of SEC enforcement action to uphold basic securities laws. Having said that, if you still want to swim with the sharks, it is necessary to evaluate the best moving averages for trading stocks.

Investopedia defines moving average as “an indicator frequently used in technical analysis showing the average value of a security's price over a set period. Moving averages are generally used to measure momentum and define areas of possible support and resistance.”

They go on to say that moving averages are crucial to understanding the trend of a stock, whether upward or downward, and help to cancel out the “noise” that can often be misinterpreted as a trend.

The Best Moving Averages for Trading Stocks

The best moving averages for trading stocks really depends on the security being traded and the preferred analysis indicator of the stock’s major players. However, there are three moving averages which are generally considered to be the most useful and the easiest to understand when investing in stocks. These are:

• Simple Moving Averages. The simple moving average is by far the easiest to understand and perhaps the best tool for novice investors who are just learning to invest money. This indicator measures the average price of an instrument over a specific time frame. To come up with this average, investors will merely add the closing/opening price for a specific number of days and then divide the sum by the number of days in the period.

• Exponential Moving Average. Unlike the simple moving average which gives equal weight to each trading period, an exponential moving average puts more weight on the most recent prices and can thus confirm a change in the market’s trend much more quickly. For this reason, the exponential moving average is a favorite among day traders.

• Weighted Moving Average. The weighted moving average is another variation of the exponential moving average, only this type of indicator places an even greater weight on the most recent prices. While this indicator is said to create more noise than both the simple and exponential averages it can also respond more quickly to rapidly changing trends.

Finding the best moving averages for trading stocks is really just a matter of preference and depends largely on the type of investing you want to perform. Traders looking at holding positions for a matter of weeks will typically use the 3/13 to indicate the shorter-term trend.

For traders focused on a slightly longer time frame, generally a few months, they will use the 20/50 to indicate trend. Longer term investors use the 50/200.

The crossover of two different moving averages on a graph is used by many traders to indicate the upward or downward movement of a stock, and the entry and exit points (buy or sell signals, with a buy signal occurring when the shorter term moving average crosses up and over the longer term moving average).

What it boils down to is this: your timeframe. The shorter your time frame, the small the moving average you will use. Therefore, the best moving average for trading stocks will vary accordingly.