DavidWaring

In our last lesson we looked at the two main types of moving averages, the simple moving average and the exponential moving average. In this lesson we are going to look at some of the ways that traders use moving averages to pick their entry and exit points in the currency, commodities, and equities market.

As moving averages are lagging indicators they tend to work well in identifying and following a trend and not to work well in ranging or trend less markets. Because of this traders will often use them to trade with the trend as well as to identify potential areas of support or resistance which may result in a continuation or reversal of a trend.

The most basic way that traders will use moving averages is to identify and then trade with the trend of a particular instrument. Although most traders will probably want to use the moving average in conjunction with some of the things that we have learned so far and some of the things we will learn in future lessons, the most basic way to trade using just the moving average is to buy when the price of a financial instrument breaks above the moving average line and sell when the financial instrument breaks below the moving average line. For confirmation traders will often wait for a full bar to close above the moving average line before entering long and a full bar to close below the moving average line before entering a short position.

Example of Trend Following Using Moving Averages:


A second way that traders use moving averages is to identify areas of support or resistance and then trade the break of these levels, looking for a potential reversal of the trend. When a financial instrument has shown a particular moving average level to be significant from a support or resistance standpoint in the past by testing the moving average line several times, and then breaks that level, traders will often see this as a warning sign that the trend is reversing and position themselves accordingly.

Example of Trading Support and Resistance Breaks Using Moving Averages:


The last way that traders will using moving averages is by plotting a longer term moving average and a shorter term moving average on a chart and trading the cross over. The idea here is that the shorter term moving average will be faster in identifying changes in the trend and therefore traders will look to get long when the shorter term moving average crosses above the longer term moving average and short when the shorter term moving average crosses below the longer term moving average.

Example of Moving Average Crossovers:


That completes this lesson. You should now have a good understanding of how many traders trade moving averages. In our next lesson we are going to look at an indicator which is based on moving averages called the Moving Average Convergence Divergence (MACD) so we hope to see you in that lesson.

As always if you have any questions or comments please leave them in the comments section below so we can all learn to trade together, and good luck with your trading!

sphereless

Hey,

Great site.. U referred to a link about moving averages.. Curious where that was?

Thanks

Russ

David Waring

Hey Russ,

Thanks again for the comment. Below is the link I refer to in the video:

http://www.informedtrades.com/tags/moving+average/

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

MajorDisaster

Hi David,
I was also interested in the 'Resource Page' you mentioned at the start of your video, to expand upon the topic of moving averages, but I couldn't see the link you mentioned, and the one you provided for Sphereless results in an 'Invalid Link'.

David Waring

Hey Major,

Glad to hear from you.

I have added a working link to the resources I refer to in the video below the video.

Hope that helps.

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

MajorDisaster

Nice on David. Thanks!

JonBoy

I've been checking some historical data for a couple of UK financial stocks, and I'm totally amazed at how accurate the MACD triggers are.

Is there an indicator that is better than others to use in conjunction with MACD to provide further confirmation?

Also what are the best periods to use in which circumstances?

Cheers, Jon

David Waring

Hi John,

Glad to hear from you.

Generally most successful traders that I know focus primarily on price and volume and then use indicators to confirm or provide more insight into what price and volume are telling them.

With this in mind I always suggest using multi-timeframe analysis to get a big picture overview of the market in conjunction with any indicators. As for timeframes, an indicator will tell you basically the same thing regardless of what the timeframe that you are using so in my opinion the choice of timeframe should rely depend more on a traders overall strategy and trading style rather than the indicator they are using.

Here are some videos that may shed some more light on the above line of thinking:

Day Trading Lesson 6: Multi Time Frame Analysis

An Introduction to Day Trading

An Introduction to Swing Trading

An Introduction to Position Trading

Hope that helps.

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

itzarvind

Hi David,

I have attached the Graph consisting of (20 50)EMA and (20 50)SMA,

EMA gives more weightage to the recent values.

SMA gives more buy and sell signals than EMA.

On the other hand signals created by SMA doesn't last long.

EMA creates less signals than SMA, but are strong.

Whats your view on this?

Regards,
Arvind

Attached Thumbnails

 

Las

hi Dave

I want to know what are common setting period that trader use for the MA crossover?

Las