What is the moving average (MA)?
The moving average (MA) is used in technical analysis to smooth out price data by creating a constantly updated average price.
The moving average is calculated over specific time intervals, for example10 days, 20 minutes, 30 weeks, or any period tailored to your needs.
“Moving average, a technical analysis indicator, is used to filter out noise on a price chart”
Why use the moving average?
Moving average, a technical analysis indicator, is used to filter out noise on a price chart.
So take a look at the direction of the moving average to get a basic idea of which way the price is moving. If the moving average is angled up, the price is moving up (or was recent) overall. Alternatively, if the moving average is angled down the price is moving down overall. Likewise, if the moving average is moving sideways, then the price is likely in a range.
Moving average can also help to determine support or resistance
So in an uptrend, a 50-day, 100-day, or 200-day moving average may act as a support level, as shown in the figure below. This is because the average acts like a floor (support), so the price bounces up off of it. In a downtrend, a moving average may act as resistance; like a ceiling, the price reaches that level and then starts dropping again.
“moving average can also help to determine support or resistance”
What is the common moving average length?
Most trading platforms support 10, 20, 50, 100, and 200 moving average.
These lengths can be applied to any chart time frame (one minute, daily, weekly, etc.), depending on the trader’s time horizon.
One popular method used by day traders to identify trading opportunities is to use the 20 moving average, 200-period moving average within a 2-minute chart.
“sometimes the market will respect moving average support resistance signals and other times it will not” – Win Investing
When do you buy and short using the moving average?
According to Oliver Velez’s method on moving averages (one of the most enthusiastic presentations we have seen to date on moving averages) you buy when the price is above the 200 moving average and just above the 20 moving average. The three-point finger to the upside is your buy signal
Likewise, you short (sell) using this method when the price is below the 200 moving average and just below the 20 moving average. The three-point finger to the downside is your sell signal.
What are the disadvantages when using moving average in your trading?
Moving average is calculated on historic data and nothing about the data is predictive. In short, the results using the moving average can sometimes be random. Sometimes the market will respect moving average support resistance signals and other times it will not.
Finally, if you decide to trade using the moving average it is always recommended to use stop losses as technical indicators are not 100% accurate.