Moving average is a very flexible term and is commonly utilized in technical indicators. They are also known as one of trading tools that are most commonly used. This may be due to the reason that they are simple to experiment with and calculate. It is also often utilized in determining the trends and reversals in the market.
You may get the gist of what moving average means just by the second word. It refers to the average of a specific group of data or information. The ‘moving’ word would mean that the average is computed and constantly changing on a timely basis.
It is great when the trader using it also knows how to efficiently use it. However, there are still instances when they make a wrong move when it comes to moving averages. This is why we will be helping you to get a better grasp as to what is moving averages and how to use them.
Common ways moving average is used:
First, they are often used for mean reversion trading strategies. There are instances that stocks would embrace the moving averages they have in the long run, the mean reversion traders will then try to search up for stocks that have reached above or below the moving averages they have. They would then set out trades that would profit if only they would go back to their previous lines in time.
Second, we can see traders using moving averages as probable support and resistance levels in the market. This is because stocks that are currently in an uptrend would find the need to rely on the major moving averages, such as those 50-day simple moving averages. The usual scene in the market is that traders would usually purchase stocks during an uptrend as they approach major moving averages from the under.
A different way traders would use moving averages is through trading signals. For instance, the 50-day simple moving average passes over the 200-day moving average; it is often a clue that is termed as the “golden cross” in the market. But if the opposite happens, meaning the 50-day goes below, it is often termed as the “death cross.” One thing you should take note of is that moving averages cross over do not work well in the ranging markets. When the value bounces up and down between support and resistance, you can often see that the moving average is situated around the middle of the values.
A moving average helps keep the price data stand in more simplified terms, aiding to create this one flowing line in the charts which makes the trend much easier to see in the charts. It may seem to you that moving averages are predictive, since they are grounded on the basis of the historical data and they simply display you a picture of the average on a specific time frame.
Overall the moving average is one of the most commonly used indicator but it is still very effective in what it does.