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.
To get the heart of the watermelon, 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 can help to reduce that stress.
The negative? You will never sell top-tick.
The positive? You will dramatically reduce the shakeouts.
135% Profit In Sea Limited With Only The 21-Day EMA
Sea Limited (SE) is a great example of how using the 21-day EMA can help you capitalize on a huge move.
Shortly after the April 6 Tom Petty "Won't Back Down" follow-through-day, SE stock broke out of a short cup-without-handle base with a 52.87 buy point on April 16 (1), closing at 53.95.
It immediately paused, creating a small upward-slanting shelf pattern. SE 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 would have helped you sit tight the following day when it closed down 5.1% on heavy volume.
As of July 8, 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.
As the great Jesse Livermore said, "It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!"