SMA

How To Trade With Moving Average Indicator

In this post, I am going to share you several ways you can profit from using the moving averages in your trading. First of all, let me tell you more about this indicator before I move on to show you how to use it effectively in your trading. So What is Moving Averages? There are […]

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    In this post, I am going to share you several ways you can profit from using the moving averages in your trading. First of all, let me tell you more about this indicator before I move on to show you how to use it effectively in your trading.

    So What is Moving Averages?

    There are basically 2 main types of moving averages available in your trading chart namely Simple and Exponential.

    The Simple Moving Average is commonly known as SMA and it is calculated based on the average value of x numbers of candlesticks. If you plot a simple moving average with setting of 200 periods, what you are getting is the average reading of the past 200 candlesticks.

    SMA

    The Exponential Moving Average is commonly known as EMA and there is a big difference in the calculation of this moving average as compared to SMA. For the calculating of the EMA, the more recent datas are given more weightage in the calculation and therefore makes the EMA more responsive and dynamics as compared to SMA.

    Personally, I only use the EMA in my trading as I find it more responsive to market changes and therefore can help me react faster to market movement.

    Below is a picture to show you these 2 indicators on the same chart.

    SMA vs EMA

    Now let us go through how I use the Exponential Moving Averages in my trading.

    1) The EMA can be used to identify the current trend of the market with high accuracy. All you need to do is to plot a 200 period EMA on any time frame of your choice, you can then make use of the gradient to tell the trend.

    If the 200 EMA is sloping upward with great gradient, then you are seeing a strong uptrend. If it is sloping downward with good gradient, then you are seeing a strong down trend.

    UP trend

    Down trend
    If you see this 200 EMA flat with no gradient, then it is telling you that the market is in consolidation.

    No Trend

    2) The 200 EMA is also a very strong level of support and resistance level that you can use in your trading. In fact, the 200 EMA is voted by a group of traders in a trading magazine as the most reliable indicator. You can see that the price usually get repelled by this level when it first hits it.

    First test 200 EMA

    With this knowledge, you can use this level as an entry or exit point for your trade.

    3) The exponential moving average is more than just the 200 EMA. With different setting, you can use it to do different things for you in trading.

    If you plot 2 EMAs with settings of 50 and 100 as their period. You will have a signal indicator on hand. When you see the 50 EMA crossing below the 100 EMA, it is a sell signal. When you see the 50 EMA crossing above the 100 EMA, it is a buy signal.

    Crossover1

    Besides using 2 EMAs to form a buy and sell signal, you can also play with 3 or even 4 EMAs at the same time. As long as the faster EMA crosses below the slower EMAs, it is a sell signal and vice versa.

    Multiple Crossover

    As a whole, I use the Exponential Moving Average in almost all my strategies and it has proven to be a worthy indicator for me so far. So try it out yourself and see if you can incorporate it into your trading strategy as well.

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