How to Trade Moving Averages Part 1


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the moving average is one of the most commonly used technical indicators if you've spent even a little time looking at price charts you will have noticed that most often the price of an instrument will move up and down in fast moving markets you may find that the price may be surging up only to plummet moments later before surging up again increasing the potential for false signals the moving average can help filter out the noise from random price movements and smooth it out in order to see the average value moving averages are used to identify trends and confirm reversals when the price is above the moving average line we consider the instrument to be in an uptrend conversely if the price is below the moving average line we consider it to be in a downtrend the breaking of the moving average line usually implies a trend reversal moving averages are also used to identify areas of support and resistance many traders will consider the moving average line as a support and resistance level indicator and based trades on it so traders will check to see whether the price is going towards the moving average and see whether it will bounce back from it or break it as with regular support a resistance level often times the price of an instrument will find support at the moving average line when the trend is up and will find resistance at the moving average line when the trend is down so moving averages will tell you whether an instrument is trending up down or if it's ranging it can tell you if a trend is still in motion and whether it is reversing or losing momentum have in mind that a moving average is based on past prices and is known as a lagging indicator therefore it will not warn you in advance but it will confirm when a trend change has taken place at the most basic level when the price crosses up and over the moving average traders take this as a signal to buy one it crosses down under the moving average line they consider it a signal to sell let's take a look at the types of moving averages there are three main types simple weighted and exponential we will discuss the simple moving average or SMA first and show you how it's calculated so that you can adjust it according to the given market circumstance so if you wanted to plot a 10 day simple moving average you would add the closing prices of the last 10 days and divide by 10 calculation gives equal weight to each day it's called a moving average as the oldest price is dropped each time a new period becomes available in this way insuring that the average is based only on the last X number of periods in our example for the last ten days have in mind that the longer the simple moving average period the more it lags and the slower it is to react to the most recent price movement and this brings us to its downside as equal weight is given to all periods considered in the calculation the simple moving average is slower to respond to rapid price changes that might prove to be important so how can you counter this with another type of moving average either a weighted or an exponential moving average the weighted and exponential moving averages are calculated differently from one another but both types give more weight to recent periods and thus more emphasis on what traders are doing at the moment so as a result weighted and exponential moving averages respond faster to price action by distributing more weight to recent periods and less to older periods they reflect a quicker shift in sentiment which can be due to changes in supply and demand or important news events that impact the traded instrument to illustrate what we mean if you were to plot an exponential moving average and a simple moving average on a chart you will see that the exponential moving average is closer to the current price than the simple moving average apart from the type of moving average you also have to decide on the time period this will largely depend on the type of trend you are analyzing here are some guidelines for commonly used time periods 10 to 20 for short-term trends 50 for midterm and 200 for long-term trends are typically used when and how should you use moving averages deciding which moving average to use and the time period will depend largely on your objective use exponential moving averages for shorter timeframes or if you're analyzing a fast moving market as you'd have more emphasis on the latest prices use simple moving averages if you're planning on holding a position for a longer period of time as the exponential moving average might be too sensitive and give false signals you should also use simple moving averages if you just like to filter out the noise and random price fluctuations to determine the overall market direction thank you for watching this tutorial on moving averages our next video will focus on how to trade using moving averages don't forget to subscribe to our YouTube channel and visit our blog for additional information if you have any questions please let us know in the comment section and we will get back to you we wish you successful trading with trading - 1 -