20 Day Moving Average

Another important component of a moving average is its ability to emphasize the direction of a prevailing trend.

As discussed in the section of trends, there are only 3 trends a market or a stock can create in any given time frame.

The 3 trends are:

• Up Trend
• Down Trend
• Side Ways Trend

The beauty of a moving average is that it visually presents to the trader the prevailing trend. This prevailing trend can be seen on all time frames.

This component of a moving average is vital as it clearly presents to the trader, whether the market or stock is either in an Up Trend, Down trend or Sideways Trend.

In the above example the 200 ma is flat, the 20 day moving average is keeping the uptrend in place. When you see a stock above its 21 day moving average, you would never short the stock.

The astute trader would try and find an entry after the stock has pulled back to the 20 day moving average.

The perfect entry point for this stock would be $24.40. This entry point is close to the 21 day moving average. As you know, stocks that trade far away from their moving averages are bound to experience a pull back.

Wait for the stock to make a pull back and then enter the stock, knowing that moving average below it will act as a support area to push the stock higher.

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