How to use moving averages? Moving averages can be used just by themselves or by combining them with other indicators. There are differences between moving averages as well.
There is Exponential Moving Average (EMA) and Simple Moving Average. They work pretty much the same, but the EMA gives more weight to the most recent candles. You can decide which one suits you better.
Trading with just moving averages
You don’t necessarily need a lot of different indicators. You can get started with just one or two moving averages; for example 200 and 50.
The strategy can be, for example, when ever the price is above the 200MA, you can only take long positions. If the price is below 200MA, you can only take short positions. Then define your entries with the 50MA, as you see fit. There are benefits when keeping your trading strategy simple.
You necessarily don’t have to use moving averages at all when determining when to enter the trade. One option is to simply use them to see the market directions and which way the trend is going. You can determine the trades just by looking at candles, with the help of moving averages. What ever suits the best for you.
Using moving averages as part of your strategy
You can include moving averages to other strategies as well. They are very commonly used and can be used to see the trend direction more clearly. You can combine moving averages with different indicators and use for example 200MA to determine if you only seek for long or short positions, like mentioned before.
How to use moving averages in your chart
You can find moving averages usually on the indicators tab of your chart program. Then you can search for Moving Average (MA), Exponential Moving Average (EMA) or Simple Moving Average (SMA). You can usually adjust the length of the moving average by giving it a value. Like I said, most used is probably 200MA.
Keep in mind that if you change the timeframe that you are looking for, the timeframe of the moving average changes too. If you use an hourly chart with a 200MA, the moving average will show the average of 200 hours. Changing the timeframe to, let’s say minutes, the 200MA shows the average price of the last 200 minutes, which only equals 3 hours and 20 minutes.
Things to keep in mind
Like other indicators and candlesticks, the moving average tells you the information based on past data. It can’t tell how the price is going to behave in the future, but it can give you some information about where the market is headed, and what kind of trend the market is on.
You can trade even without any indicators. Most of the traders still use indicators, and I would say that moving averages are the most common ones.
How to read moving averages
Usually, when the price is below 200MA, the price is in a downtrend. Example of this below. Screenshots are from Tradingview.com.
If the price trades above the 200MA, it can be considered in an uptrend. How strong the trend is will be determined by the angle of the 200MA. Example of this below.
Price can move in a “sideways trend” as well, when it hovers around the 200MA. Then there is no clear direction where the price is heading. This can be a hard spot for traders to get trades.
Final words
That’s about it, hopefully you learned something new and know how to use moving averages in your trading. Have a nice day. Other day trading related posts can be found here.
This is not financial or investment advice. Always do your research before risking your hard-earned money. Keep in mind that some estimates say that 95% of day traders lose money.