Market trading has been difficult for traders sometimes due to lack of knowledge and understanding, and the other reason could be no use of the technical and fundamental analysis tools. These tools or indicators are significant to plan and strategize the trade. For effective and efficient trading, the traders use trading platforms for analyzing the market in advance.
The fundamental trading tools are for economic, social, and environmental changes, whereas the technical indicators refer to price movements. The price of the asset is significant for the desired results. If the price is known, traders can accordingly plan their trade. Therefore, technical indicators are necessary for the results.
One of the most used technical indicators is moving average trading, a statistical instrument that is used for analyzing the price movements from the previous trades and using the series of averages. In the process, there are different subsets of the data for the prices of the assets. With the article, readers will know the use of the moving averages strategy and how it could be used for beneficial trading.
What is Moving Average Trading
Moving averages have been referred to with various names in the financial market. It is called rolling average, simple moving average, running mean, etc. In the trade, the moving average trading tool is used for time frames that help traders have a view of the market in terms of the specified time periods. Being a technical indicator, moving averages have been used frequently by traders because of their simplicity and correct statistics about the market.
It works as a finite impulse response filter, including variations such as cumulative, simple, and weighted. The indicator takes the average of the prices of the asset traded arranged in a number of series. Later, the first number of the series is removed with the inclusion of the next number; this is called the shifting forward. It is a simple process of analyzing the price of the traded asset in reference to past price data.
Moreover, the time series helps traders of the strategy minimize the short-term market fluctuations and emphasizes the long-term market trends. In moving average trading, investors or traders set the parameters of the market, i.e., the short and long term, as per requirement.
The moving average trading aids the traders to have a view of the market movements in respect to past trading of the asset. It is assumed that the situations of the market repeat themselves, and market analysis through the average of prices gives traders an understanding of the trade condition and helps them invest. Thus, it is smoothing the data for easy trade.
Example of Moving Average Trading
An example would be good to understand the moving average trading, as it will give a more accurate view of the strategy and how traders can use it to invest. Suppose there’s an asset and traders want to know the asset’s closing price for the last 4 days. Given below is the data:
- The first-day closing price 300
- The second-day closing price 301
- The third-day closing price 303
- The fourth-day closing price 305
The four days’ prices are 1209, which is divided by 4 to get the average. So, the average price of the past four days equals 302.25. So, we can conclude with the data that the asset’s average closing price is 302.25 for four trading days.
In moving average trading, the first-day data is left to get a new moving average. So, traders will get the next day’s data, i.e., of the fifth day, and leave the first day’s data to get a new moving average closing price. The process continues, and traders can set the time frame as per their asset needs and market dynamics.
How to use Moving Average?
Moving averages are of various types, and a trader can use the one that supports their market and trade instrument. It is basically of four kinds: simple moving average (SMA), exponential moving average (EMA), linear weighted moving average (LWMA), and smoothed moving average (SMMA).
A trader can access the indicators with the help of online brokers. For example, ABInvesting is a good market broker with all the required tools and indicators. The broker is regulated with advanced trading platforms and tools that aid traders analyze the market. Moreover, the broker has various trading accounts, deposit and withdrawal processes, leverage facility, zero trade commission, etc., for a successful and efficient trade.
Traders can use the moving average trading in three ways, below discussed are the ways for successful trading.
Trend Direction and Filter
The traders can determine the market trend direction of the asset traded with the exponential moving average. Thus, the strategy helps traders remain in the correct direction of the trade and earn profits. This gives traders the possibility to get desired results and
Marty Schwartz is a great supporter of moving average trading; the trader uses fast EMA for having the right direction of the trade and filtering out the wrong market directions.
Trend direction is an essential part of the moving average trading, and if a trader is able to analyze it, they can have profits. The trade is on the right path, and success can be achieved easily. Therefore, to use the moving average, traders should know the trend of the market and invest in the correct direction using the filters.
In addition, the traders of the swing strategy can use the moving average trading. The traders use golden cross and death cross signals that occur when there are 200 and 50-period moving average crosses. These are used for daily charts, and traders enter the market in short when the 50 crosses the 200 and go for long when the 50 goes above the 200 periods of moving average.
Placement of Stop and Support and Resistance Level
With the moving average, traders can analyze the support and resistance levels. These aid traders to know their market entry and exit and place the stop in order to have a profitable trade. The moving average trading works efficiently with support and resistance. With these, traders can place stop-loss orders and have a safe trade. Thus, minimizing their risks and maximizing the profits.
The range is something that does not go along with moving average trading. As the price ranges back and forth, the moving average lines in between, and the price does not go in respect of these. Hence, traders should know when they can use the strategy for a beneficial trade.
The Bollinger Bands is another technical indicator that is used with moving averages.
The strategy is based on moving averages and involves 20 periods of moving average and outer bands find the price volatility. Thus, it is important for the traders of the market to analyze the prices of the asset. When the price touches outer bands in range, traders go for rejection as it foreshadows the market reversal in the opposite direction. These help traders during range.
With trends, the Bollinger Bands are useful as they help traders be in the trade. For example, when there is a strong market trend, then the price pulls away from the moving average, and it moves close to the outer band. The violation of the outer band in trend brings the foreshadow of retracement, and that means reversal during the time when moving average breaks.
Moving Average Trading Secrets
The moving average trading has secrets that bring traders closer to their desired profits. To earn good profits from the strategy, traders can have some secrets followed to keep them on track and earn more money than they invested. Below we have mentioned some vital points that could help traders get good returns.
So, let’s drive in quickly to understand the trade for better results:
#Exponential Moving Average Trading vs. Simple Moving Average Trading
A trader can use either of the two moving average strategies for trading. The simple moving average uses the divided prices based on their specified time frames to analyze. The division of the prices is simple, with no extra factor added. In contrast, the exponential moving average is more weighted on the current prices of the instrument traded.
Thus, EMA is thought to be much faster than SMA. Traders, however, should be careful of the whipsaws.
On the other hand, in SMA, if traders go for a long term, they may miss the entry and exit.
#Ten Period EMA
Day traders of the financial market go for a ten-period EMA for a professional trade. The ten periods EMA gives data of two weeks of the trade, which offers a brief data of the trade which is sufficient for the market volatility. The traders can have an idea of the trade through the ten days data.
If the price is above ten days EMA, then traders believe that it is a bullish trend, and similarly, if the EMA is below ten days, it is a bearish trend.
Moreover, traders can use it for different EMA’s, say for 15, 5, or 30, etc.
#Serves as Forecast
Traders use the moving average trading to have a more sensible and accurate price action. A trader can use the strategy for the following market predictions:
- Support and resistance level
- Direction of trend
- The shift in trend direction
- Mean reversion levels
- Experimenting with all the moving average strategies
- Could be used in combination
#Great reversal/ retracement targets and divergence
Using the moving averages is the perfect tool for trade in the divergence of the market. When the price of the asset keeps moving higher highs and low or lower lows and highs, then the trend reaches exhaustion. The condition occurs due to the momentum fading with the new highs and lows.
When a divergence happens in the market, the traders expect the price to return to the moving average at the minimum. It could lie anywhere between 100 to 150 EMA.
However, the price may sometimes miss the moving average band.
Angle is an important part of the moving average; when the moving average starts to move at a steep angle, the condition indicates traders of a buying excitement. Traders can check the angle formed on the charts and patterns provided by the brokers through the trading platform.
The prices are mainly close to the moving average in a heavy market. In the bullish trend, the price of the instrument is higher than the moving average. In comparison, the bearish market trend, the price is lower than the moving average. Traders should keep an eye on the distance between the price and the moving average.
Traders must also check the lower and higher time frames for the short and medium market movements of the asset traded.
It is seen that traders use charts to confirm the trends of the market. A trader can use 10, 20, 50, or 200 EMAs for this purpose. Therefore, traders must be aware that the trend of the market is significant for strong market investment. Traders should be able to read the chart statistics and trends for making the best out of it.
In the article, we have already mentioned the golden cross. It is studied through the daily charts; when the 50 DMA crosses above the 200 EMA, the traders regard it as the start of the monster rally and use it for earning benefit.
The death cross is contrary to the golden cross; the cross is studied on a daily chart, and when it is viewed that the 50 DMA crosses below the 200 EMA, traders consider it the bear phase.
Moving averages are certainly important for trade; these have been helping traders analyze the market prices of the instrument and invest. With the above article, readers by now must have understood the moving average trading. It is a strategy that aids the trader in investment in various ways.
However, investing in the market has to be researched and studied. Thus, traders must first understand the market, its terminologies, and other market factors for a good trade.