The Power Of The Moving Average For Profitable Trades

The humble moving average is often mocked as a beginner’s tool for traders and something that is woefully insufficient for uncovering profitable trades. I beg to differ.

I have always thought the moving average is way undervalued as a tool. When you think about it, it takes the price data from a series of time intervals, no matter how varied, and gives you the overall direction of the trend. This is incredibly valuable.

Another way of stating the value of this is, it takes price action that may be putting you on an emotional roller coaster, causing high levels of stress, and reduces it down to a simple line that is sloping upwards, downwards, or is flat. This is not a trivial thing, and once appreciated can put you in a strong position to becoming a profitable trader.

One person that really understands this is Rolf at Tradeciety. He has written a great article titled The Best Moving Average Strategies that walks through a video he made that details ways he used various moving averages to make profitable trades. Take a look:

In this video we are mostly focusing on the 50, the 100, the 200 and I will show you how to use them in your trading. I use a simple moving average. It doesn’t really matter and the differences between the SMA, the EMA, are very, very small. The most important thing is that you always keep the same moving average. So don’t use the simple moving average the one day, then the next day you use the exponential moving average. Choose one and then stick to it. Read full post here …

thumbnail courtesy of tradeciety.com

Where many traders go wrong with using a moving average is setting the indicator too short term. The 20 MA is a popular setting, however no matter what time frame you are using, it is too noisy and gives little tradable information back to you.

On the other hand the 200 MA is much smoother and gives a clearer picture of the overall trend. Due to the fact that the 200 period moving average contains more data, it is generally accepted as what indicates the long term trend. With this broader picture that gives the price action you are looking at more context, you are able to make better decisions on trade entry and exit.

With this in mind you can use multiple moving averages together. The most popular combination, even at the institutional level is the 50 MA coupled with the 200 MA. The signals produced by these two are known as the Golden Cross (a bull signal where the 50 MA crosses to 200 to the upside) and the Death Cross (a bear signal where the 50 MA crosses the 200 to the downside).

In the context of trending markets, each represents a decisive turn in the market from one direction to another.

Image Source:Metatrader4.com

So if you haven’t done so already, familiarize yourself with moving averages and how to use them. For all instruments and in different conditions they can be an endless source of profitable trades.