The use of simple moving average

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The use of simple moving average

Post  BlueBlur on Sun May 06, 2012 4:08 am

Today, I am sharing on the topic of how to use simple moving averages the simple way. First, what is moving averages? it is a technical analysis term meaning the average price of a security over a specified time period (the most common being 20, 30, 50, 100 and 200 days), used in order to spot pricing trends by flattening out large fluctuations.

Look at this chart that uses 50 MA and 15 MA.

When you're using a shorter time period for MA, you're going to expect a faster reacting trend line. Observe how the 15 MA reacting fast to the candlestick trend of the chart. Conversely, a longer time period for MA is going to get you a slower reacting trend line. However, a longer time period has far more accuracy than a shorter time period. Why? A long time period MA make use of more data from the historical price movement to compute the trend, hence it is far more accurate than short time period MA.

Now that we know what moving averages is all about, we want to know how to use them. When the shorter time period moving average crosses over the longer time period we had what we called the GOLDEN CROSSOVER.

Look at how the 50 MA crosses the 100 MA. This tells us that the price is trending UPWARDS and that is when we should hit the BUY button and ride the upward trend till the death crossover occur (explained below). However, do not enter the market as soon as the cross is made. You must wait for both of the MA to point upwards before you make any action. This is to avoid false breakout which can be very common in volatile market like FOREX.

On the other hand, we also have what we called the DEATH CROSSOVER. This is when the shorter time period moving average crosses over the longer time period moving averages as illustrated by the chart below.

Look at how the 100 MA crosses over the 50 MA. When this happen, we hit the SELL button and ride the trend all the way downwards till the golden crossover occur. Similarly, we would want to wait for both the MAs to point downwards before we hit the SELL button to avoid any false breakout.

This is all to simple moving averages. Although this topic is written under FOREX, it can also be used on STOCK as part of your technical analysis tool.


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