Moving averages are the oldest indicator in the book, but far from antiquated. Moving averages give you more information in a single glance than any other indicator. The concept is simple – as price goes up and price goes down, a moving average shows you the average price over time.
What’s so special about that?
Let me tell you. Here are 4 ways moving averages help you get your trading groove on!
- Moving averages give you context so you know if price is coming or going from levels where the market previously found equilibrium. This matters in a trending market because you can tell how extreme the trend is, or for how long it’s been trending. It’s helpful in a ranging market because the moving average marks the mid-line, and everything happens from there.
- The market requires drive to produce a move that drives price to levels higher or lower than the average. You can infer the opposite is also true, and expect price to easily slip back toward the average in the absence of anything driving it away. If your profit target is in the direction of the moving average, your chance of success is increased as you get closer to the end of the week, and the initial push fades out of the market.
- Have expectation of momentum towards the moving average when it becomes a target. If price has not touched the moving average for a length of time, you can expect the market to “move it move it” with momentum back to that line. How long? Double your moving average number, and then it becomes a target.
- Moving averages can be like a compass for direction. For example, I use the 200 MA as an indication for overall direction in the market. If price is below it, I’m looking for sells. If price is above it, I’m looking for buys. But don’t forget to double the number, (see #3 above) and get ready to “move it move it” if price hasn’t touched the 200 MA for 400 bars of time. Then it becomes a target.