Using a moving average when analyzing the situation on your chart can increase your trading efficiency significantly. The concept is fairly simple to grasp, so we will go through it in this article to help you start using it if you’re still not familiar with the way it works. The main purpose of using this technique is to find reliable support and resistance levels and to come to a conclusion about the way the price will behave. This is what our experts will explain in the following paragraphs. It won’t take long, so sit back and go through our text if you want to improve your trading skills and chances for success.
Moving Average | Basics
First of all, you need to know that the moving average is always plotted onto a candlestick Chart. It considers highs and lows of a candle and then shows us its value in relation to where the price is at that moment. The number of candles that are included in this average is determined by you, but the most popular amounts are 200, 100 and 50. Just remember that a bigger moving average requires a longer expiration time. It can also act as a dynamic support or resistance level for the price you’re monitoring. Apart from different numbers of candles, there is one more way of differentiating between averages because some of them can be simple (SMA) or exponential (EMA), but the main principle remains the same. Let’s now see how you can use all of this when trading.
Moving Average | How to profit with them?
The most common way to use a moving average is to buy call options if the price is above it and put options if it’s below. A more advanced technique is to compare a bigger and a smaller MA and if they cross each other you know it’s time to react. This is because smaller MAs show more recent behaviour of a price, so if that surges you know that a price is moving strongly. MA200 is the most important moving average in trading and if a smaller MA is crossing it we’re talking about a golden (bullish) or a death (bearish) cross. The bigger the difference between the two moving average involved in the cross, the stronger the Signal. On top of all that, MAs are all very visible on your chart, so it’s easy to extract the data you’re looking for.
Moving Average | Conclusion
Using a moving average in your technical analysis is considered vital by a huge number of experienced traders. This versatile tool can help you learn a lot about a price, so mastering it should be high on your list of learning priorities. It’s really not that difficult, but the gains could be big. Combine that with our other educational articles available on this website and you’ll be a trading machine in no time!