The 21-day exponential moving average (EMA) can be thought of as the Goldilocks of moving averages.
We have dozens of Investor’s Corners on when to buy a stock and when to sell. But what about holding?
A 10-day simple moving average (SMA) can be too tight and a 50-day simple moving average too loose.
If you accumulate enough experience in the CAN SLIM investing strategy, you might often conclude that the 21-day EMA can often be just right.
The Sitting Is The Hardest Part
Buying a stock is typically fun and straightforward.
Selling is often scary. Even after a big gain, you may wonder, “Did I sell too early or too late?” Holding your winning stock until a close below the 21-day line can help to reduce that stress. The negative? You will never sell at the top. The positive? You will dramatically reduce the shakeouts.
In an exponential moving average, the most recent price action carries a higher weighting.
How To Invest: A 135% Profit In Sea With The 21-Day EMA
Sea Limited (SE), a global platform for video games, is a great example of how using the 21-day EMA can help you capitalize on a huge move.
It immediately paused, creating a small upward-slanting shelf pattern. The stock broke above this on May 5 (2).
On May 26, it gapped to new highs. The question is this: Sell into strength or to hold on for a bigger move? Utilizing this rule of holding a winner until it closes below the 21-day line would have helped you sit tight the following day when it closed down 5.1% on heavy volume.
As of July 8, 2020, it was still above the 21-day exponential moving average, marking a new closing high at 124.46. That’s a 135% gain without thinking.
Sea Limited finally got flooded with sellers — in the near term — during a three-day sell-off that sent shares plunging as much as 12%. For two days straight, shares closed below the 21-day line.
However, the stock bounced sharply off its July 24 low. Plus, it refused to cave below its 50-day moving average. At this point, the profit cushion was still thick.
As Jesse Livermore, the subject of Edwin Lefevre’s stock market classic “Reminiscences of a Stock Operator,” once remarked, “It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!”
21-Day Exponential Moving Average For Indexes?
Not only does the 21-day work for individual stocks; it works great for indexes too. This Weekend Stock Market Update story discusses how to use the 21-day line with the Nasdaq and other indexes.
A version of this story was first published in July 2020. Please follow Chung on Twitter at @SaitoChung and at @IBD_DChung for more on growth stocks, chart analysis, bases, breakouts and sell signals.
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