Moving Averages: How To Use Them 🙂

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How to Use Moving Averages in Stock Trading http://www.financial-spread-betting.c...  PLEASE LIKE AND SHARE THIS VIDEO SO WE CAN DO MORE!  The Power of Moving Averages.  You won’t have been looking at trading for long before you come across moving averages. They are one of the fundamental tools of analysis, and crop up in all sorts of systems and techniques. As with all technical analysis however, you should not rely on a system of using moving averages thoughtlessly, but make sure you apply them in the right situations.

There’s a whole family of moving averages, as you can easily change the number of periods that are averaged. Commonly, you might use something like a five period moving average for very fast action, a medium 20 or 50-period moving average as some sort of trading basis, and perhaps a long 200-period moving average to give you an overall picture of the state of the market.

Each average is an average of the previous X number of periods, which means it is a lagging indicator, one that is following the action rather than leading it. It can only reflect what has happened in the past, but it can be used to try and predict the future.

It should be obvious that the fast average will closely track the price, as it is the average of the last five prices; the long average will be much smoother and further away from the price; and the medium average will be between the two. In a trend, you will see the price pulling away from the fast average and also settling back towards it, and you might decide to trade when the price comes back to touch the average.

However, this can result in far too much action using the fast average, so many people prefer to use something like the 20-period average instead. Looking at a typical chart with the 20-period moving average superimposed, you can see that this can be an effective way to trigger profitable trades. Usually you will find that you can’t use the long moving average this way, as the price will seldom come back to touch it.

Another method of using moving averages is called the moving average crossover. In this we don’t look at the price directly, but take a signal to trade when the fast moving average crosses over the medium moving average. This has the advantage of being a distinct point to trigger the trade entry, as opposed to trying to interpret when a price, which has a range of values on any particular day, touches the moving average.

Once again, this method can be modified in many ways. The most obvious is to try changing the number of periods of each moving average to see what works best for the particular security or index being traded. There are the variations, such as the triple crossover, which requires you to have three moving averages, and wait until the fast average has crossed over both of the others. If you read about the triple moving average crossover, you will see that it also provides a clear point to exit the trade.

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