Trading Strategy Guides: Moving Average Indicator
Experienced traders know various tools to analyze how the market will perform. One of which is the “Moving Average” (MA) indicator. For some, this tool at first is not that helpful but soon realized that despite the difficulty of getting to know this tool, it is very much helpful.
This post will not be the usual basic guide that you’ll read on. Wider understanding and further analyzation are necessary. Now let us discuss how to use MA indicator and how to understand its logic behind.
Using moving average indicator in a trend
The majority will agree that a downtrend is consists of lower highs and lows. But let us all agree that sometimes you’ll get higher high in a downtrend, meaning the trend is over.
Look at the sample charts below to picture out what we mean to say.
The point is, even if you have a lower high/lower low in an uptrend, the trend isn’t over. There’s a chance for a complex pullback before the trend resumes. See the sample chart below for further understanding.
Now, how could we determine the trend objectivity? Here’s when MA indicator becomes very helpful. Look at the sample charts below on how to do it.
Does the sample above make a point? Now, let us measure the strength of trend by checking the steepness of our MA. The point here is, the steeper the MA, the stronger the trend and the how much flat the MA is the weaker its trend could be. Look at the sample chart below.
Using MA indicator to identify value on a chart steep
Let us now discuss how to identify when to buy low and sell high. The first thing to define here is what’s low and high. We should use MA to do so. Find something that will go well to your trading approach. Look for the right exponential moving average (EMA) that will align with yo
ur personal strategy as a trader. MA is best to use in trending markets a
nd shouldn’t use in range markets. Look at the sample chart below.
Using MA to look for your stop loss
Let us now connect MA with one of the most used tools in trading – Support & Resistance (S&R). These are values on your chart that could be identified using MA. Both these tools (MA and S&R) can be a powerful strategy to use in finding where to set your stop loss.
If the market is on trend, the price has a higher possibility to bounce off a dynamic S&R, your marked area of value. Imagine your S&R as your walled mark that will prevent the market price to go through it. If you are to set your stop loss beyond dynamic S&R, it will not make much sense. Your walled mark will protect you, avoiding you to trigger early stops. Look at the sample charts below.
You can also use the same strategy and apply it to a horizontal S&R.
Using MA to look for a great entry
Let us now look for a great trading entry. In a trending market, MA can be dynamic like the S&R value. The market can have a boomerang effect that could snap back far away from your dynamic S&R.
Now, how will MA indicator help you find your greatest trading entries? If the market is overextended, the chances are it will come back towards the MA. If you are looking for the best trade entry, you might be stopped out as market retracks opposite you. Look at the sample chart below.
To better time your entry, look at the are of value such as your dynamic S&R, not when it is far off your MA.
Using MA to get through massive trends
Sometimes, it is best to go through a massive trend without looking for a profit goal/target. If we are to realize, if you have a profit target, you’ll limiting your limits wherein you can have more. To get through a massive trend, you have to remove profit limitation.
By tracking your stop loss and using MA indicator, you can ride through a massive trend. MA can also be your dynamic S&R, sometimes can be acknowledged by the market for a longer period. Look at the sample chart below.
Using MA to look for the best market to trade
We could use MA indicator to find the best market to trade in. Let us use the method of MA indicator to find the relative strength. The first step, let us pick the markets within the same sector. For instance, you’re looking at indices, you might compare markets, like the S&P, Dow, and Nasdaq. The second step, draft your MA indicator on your charts. The third step, compare steepness of your marked MA. The steeper it shown, the stronger/weaker the market.