The moving average indicator is used by professional and beginner traders the world over. They are an extremely useful weapon to have in your arsenal. Moving averages can give you a clear indication of whether the market is trending up, down or sideways and they can also be used as entry and exit points. We discuss the different types of moving averages and their uses below.
Moving averages – what are they?
Moving averages are what they sound to be – a line on your chart depicting the average of the price movement over a specified time interval.
There are many different types of moving average indicators, but two of the most popular ones include the Simple Moving Average and the Exponential Moving Average.
The Simple Moving Average (“SMA”)
The Simple Moving Average gives equal weight to each of the points in the time interval. It is a lagging indicator seeing as it follows the movement of the price.
The Exponential Moving Average (“EMA”)
The Exponential Moving Average places greater weight on the most recent points in the moving average line. It is a lagging indicator seeing as it follows the movement of the price.
How can moving averages be used to make more money in trading?
Moving averages can be used as great indicators to find entry or exit points.
Moving Average lower time frame entry points
For example, when entering a trade on a larger time frame, you may wish to zoom in, on a smaller time frame, and consider waiting for the price to jump up over the 50 period exponential moving average. This can indicate that the price has started to trend up. Conversely, if you are entering a trade on a larger time frame chart you may wish to see what the price is doing in relation to the moving average, on a smaller time frame – if the price is still below the moving average, it might be a sign to wait a while.
Moving Average indicators – Golden Cross / Death Cross
The moving averages themselves can be used as indicators in conjunction with other moving averages. For example, a common setting is to have two moving averages, one with a period of 50 and the other with a period of 200. If the price has been down trending for a while, at the point where the 50 period moving average crosses up over the 200 period average, this can indicate a good entry point. This is known as the Golden Cross.
Similarly, for the opposite situation, when the 50 period moving average crosses below the 200 period moving average, this is known as the Death Cross.
The Golden / Death Cross can indicate the start of a long down or up trend. They can be good indicators to use when riding a trend and trying to understand when the trend is going to come to an end. Lets take a look at some examples:
This is a recent picture of the 4 hour timeframe on the Nasdaq – the prices have begun to recover from the war in Ukraine – it remains to be seen whether they will continue to trend upwards – they could make another downturn and newer lows yet – however, this will much depend on the FEDS and any further interest rate hikes.
However, what can be seen here is that the 50 period EMA has now crossed up over the 50 period EMA. If the prices remain on the road to recovery/a bull market, the EMAs would be unlikely to cross back the other way, for a very long time. Similarly, in the chart below, you can see the start of the downtrend when the war in Ukraine began… This was in 2022 – you can see the 50 period EMA remained below the 200 period EMA for the whole time since then.
Using the Moving Average for general trend direction
In addition to the above entry or exit signals, the moving averages can be used to understand very clearly, what direction the market is moving in. If the prices are above the SMA or EMA, the market is up trending. If they are below the SMA or EMA, the market is down trending. If they are crisscrossing up and down over the moving average, caution should be taken when using a trend following indicator or strategy because the price is likely consolidating between two points.
So we hope you enjoyed this information and that it helps you understand direction and some good entry or exit points for your trading. Happy trading!
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