Why I like moving averages

Why I like moving averages

In the market there’s only one truth and that is price. Everything else is just interpretation and/or derivative of price. Each layer of analysis and technical indicators we add to our decision mankind. Takes us further and further away from price. They’re a lot of technical indicators in the market, probably far too many. All of which take prices run them through a mathematical formula to come up with some meaning of what price is doing and/or what it ought to do next.

Amongst technical indicators very few if any come as close to price as moving averages. Of any period for that matter. It’s just that some MA periods have been regarded by the majority of traders in the market to be of more importance than others.

I particularly prefer using exponential moving averages, but this article works just as well with any kind of MA. I use daily charts as merely example every time frame works pretty much the same

 

For example

5-20 period MA = Short term support/resistance

30-60 period MA = medium term support/resistance

100-200 period MA = long term support/resistance.

You will notice prices change direction more often than not when they get to the these moving averages.

Moving averages can be great indicators of price direction. Either a single MA in relation to price in relation to other moving averages. Like if the price is trading above the 200d MA there’s a high probability that price could move higher. Inversely when the price is below the 200d MA there’s a high probability that price could move lower. Over time.

Moving averages could be used relative to another MA to indicate price direction.For example if the 50d MA is above the 200d you want to be on the long side. Inversely when 50d MA is below the 200d MA you wanna be on the short side. That’s why when these two particular MAs cross, we call that a golden cross. It signals a potential change in direction.

I use MAs to pick a side of the market I want to be in. I use Elder’s triple screen system, Well double screen in my case because I only look at 2 timeframes. I start my analysis on the weekly chart to pick the side of the market I wanna trade along. I look at the 30w EMA in relation to the 60w EMA. To get my primary trend.

30w > 60w EMA =Llong

30w < 60w EMA = Short.

Once I’ve picked the side I want to be in I wait to get a signal in the daily chart in that direction, I ignore signals against the primary trend. For example if the 30w EMA is above the 60w EMA and I get a short signal. I ignore that signal. I would only entertain the long trades.

Another layer I have in my system. Is the 200d EMA. I can only take trades if the 200d EMA is behind me. For example when I’m long I want the 200d EMA to be below price. And vice versa when I’m short, I want it above price.

This strategy takes me out of a lot of trades, but limits me to trades with a bit of wind at the back. Important to note these trade filters aren’t there to eliminate risk or losing trades. You can never eliminate losing trades; they are part of normal business. Their purpose to increase the odds of winning in my favour.

Here’s an example of a trade I took that worked satisfactory. The stock is African Rainbow Minerals

My reason for entry on this stock was a falling wedge as shown in the picture above.

The red circle is when I took the long position. The red EMA is my 30w EMA and the blue one is the 60w EMA, then the yellow one is the 200d EMA. LIke I mentioned earlier. First check the direction.

30w EMA > 60w EMA = Long

200d EMA being me on entry.

I took the trade and added into the position until i got stopped on that last pull back.

Moving averages can also be used as exit points/stop loss. For example a close below a certain MA triggers stop loss exit. Like in the lazy system, a system I trade on ETFs. The system exclusively uses the MAs for both entry and exit. A close below the 30d EMA triggers a my stop loss and I exit the position..

Conclusion

Moving averages can help you to check the direction of the wind, and ultimately trade with the wind at the back. This will improve your hit rate.

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