If you are looking for one of the most versatile indicators a moving average is one of the best. A moving average is easy to use and test. If you are looking for a indicator for a mechanical system then a moving average is great for trend based systems.
When we try and read charts we are interpreting something that is subjective. A triangle or pendant maybe seen by one trader but another will see nothing. This is why a moving average works. It gives definite trading signals.
A moving average is created by using the closing prices from the previous bars. The number of bars used creates a moving average with different sensitivity. A moving average is created by adding up the closing prices of the chosen number of bars, this number is then divided by the total number of bars in the series.
10 bar moving average would add up all of the closing prices from the previous 10 bars. This total is then divided by 10 to give us our moving average. As the market develops more bars are added and these new bars are added to the moving average and the oldest bars are removed. This produces a continuous line on our charts.
We use a moving average to help us identify a trend. Because the sensitivity of the moving average is dictated by the number of bars. A 20 bar moving average changes direction quicker than a 100 bar moving average.
Once we are aware of this sensitivity we need to know how this affects our trading. A moving average with a low number of bars is very sensitive and can give lots of false trading signals. The advantage however is that we are entering trends very early and when we do get a trend our profit potential is increased.
When we use a moving average with a larger amount of bars we reduce the number of false signals. However we sacrifice some potential profit from the trend. Therefore the length of the moving average we use depends on our trading style.
The moving average produces trading signals when we combine it on a chart with market prices. When the market is rising we are looking for the market to move above our moving average and then close a bar. Once this has happened we have a buy signal.
The same is true with a down trend. As soon as the market falls below our moving average and then closes a bar (by starting a new one) we have our sell signal. We can add a conformation signal to our trade by using our moving average. To use the conformation signal we look for the moving average to start moving in the direction of the expected trend before opening the trade. As long as the market is still above the moving average in an up trend and below our moving average in a down trend the trade is still valid.
When we try and read charts we are interpreting something that is subjective. A triangle or pendant maybe seen by one trader but another will see nothing. This is why a moving average works. It gives definite trading signals.
A moving average is created by using the closing prices from the previous bars. The number of bars used creates a moving average with different sensitivity. A moving average is created by adding up the closing prices of the chosen number of bars, this number is then divided by the total number of bars in the series.
10 bar moving average would add up all of the closing prices from the previous 10 bars. This total is then divided by 10 to give us our moving average. As the market develops more bars are added and these new bars are added to the moving average and the oldest bars are removed. This produces a continuous line on our charts.
We use a moving average to help us identify a trend. Because the sensitivity of the moving average is dictated by the number of bars. A 20 bar moving average changes direction quicker than a 100 bar moving average.
Once we are aware of this sensitivity we need to know how this affects our trading. A moving average with a low number of bars is very sensitive and can give lots of false trading signals. The advantage however is that we are entering trends very early and when we do get a trend our profit potential is increased.
When we use a moving average with a larger amount of bars we reduce the number of false signals. However we sacrifice some potential profit from the trend. Therefore the length of the moving average we use depends on our trading style.
The moving average produces trading signals when we combine it on a chart with market prices. When the market is rising we are looking for the market to move above our moving average and then close a bar. Once this has happened we have a buy signal.
The same is true with a down trend. As soon as the market falls below our moving average and then closes a bar (by starting a new one) we have our sell signal. We can add a conformation signal to our trade by using our moving average. To use the conformation signal we look for the moving average to start moving in the direction of the expected trend before opening the trade. As long as the market is still above the moving average in an up trend and below our moving average in a down trend the trade is still valid.
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