Moving Averages or MAs are among the simplest tools for technical traders. They are ones of the most useful tools that help traders in identifying trends and finding entry points.
The Moving Averages are plotted on price charts. No matter what time-frame is used, traders can apply Moving Averages on it.
For traders who analyze daily and weekly charts, it makes sense to apply Moving Averages to closing prices because they reflect the final consensus of value, the most important price of the day. While the closing price of a five-minute charts has no such meaning. Traders who rely on this time-frame are better off averaging an average price of each bar.
There are many types of Moving Averages such as Simple Moving Average (SMA) or Exponential Moving Average (EMA). The calculations are not explained here. However the EMA is recommended since it assigns more weights to incoming prices and slowly squeezes old prices out with the passage of time.
When the prices are averaged; the longer time, the smoother a moving average is. If traders make their moving average too long, they will miss important reversals. In the other hand, the shorter a moving average, the better it tracks prices, but the more subject it temporary deviations from the main trend.
In order to analyze weekly charts, traders might start with 26-bars MA since it will represent half-year’s worth of data. If traders are analyzing daily charts, they might use 22-bars MA. This reflects the number of trading days in a month. Whatever length traders decide to use, be sure to test it on their own data.
How to trade Moving Averages?
The direction of a moving average’s slope is the most important signal. When the EMA points up, it is a good time to go long otherwise stand aside. When it points down, it is a good time to go short otherwise stand aside.
Don’t trade against the slope of EMA except when the divergence between MACD or other indicators occurs.
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