What are Moving Averages and How to Use Them to Trade Successfully – Part 1

One of the most used technical indicators is what is known as a moving average. This is simply a calculation of the average price of the market over a given period of time shown moving consistently with that pair over time. In other words, the moving average will ebb and flow with the chart as it bounces up and down.

The trader can easily see if the market is currently trading above or below the moving average, and they may make some trading decisions about how they would like to respond to these movements as a result. The moving average is intended to be used to try to predict future pricing just like all the other technical indicators that one has access to.

The use of the moving average is helpful as it shows roughly where the market has been trending recently, and this may be applicable to estimating where it might go in the near future. People use these types of movements all the time to try to figure out how they should trade a pair, and if it makes sense to buy more or sell more at this time based on how the market has performed leading up to this moment.

Length of Time

It is incredibly important to note that the length of time that one examines the moving average over is vital.

A short-term moving average can be very volatile as there is a lot of pricing action that happens in a brief period of time, and much of it may not make a lot of sense.

That said, people who play these moving averages out over a longer period of time may start to see certain trends emerge that they can actually put to use and gain from.

This is why it is so important to play out the moving average over a length of time that is truly useful. To do so, you will need to set your parameters exactly right, and make sure that the windows of time are long enough to provide actual value to you.

Showing the Lag

The real value in moving averages is to show the lag between the average as it has been mapped out over a period of time versus the price that currently stands. If there is a lot of difference between the two values, then you are seeing some of the lag in the system between where the price was, and where it is now.

What could be useful from a trading perspective here is to see if the price has moved much beyond where it should be, compared to where the trends indicate the price ought to land. This is to say that if the price is significantly above the moving average, and the general trend for the market is down, then now might be a good time to get short in that market.

The same can be said in the reverse as well. It is simply a terrific way to identify where there is some difference between what is expected, and what has actually happened at this stage of the game. You might be surprised by just how valuable this information can be to you, and just how much you can use it to make predictive trades.