Moving Averages

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Moving Averages And Their Uses In Commodity Trading

By Dave Rivera

A key component of technical analysis and perhaps one of the oldest indicators around, moving averages are time-tested and affective indicators. There are many types of moving averages with varying indicators, but the primary purpose of all types of moving averages remains the same. Their purpose is to reduce or remove noise from the daily price movements and attracted trends of stocks, commodities or any thing you can plot or chart.

Moving Averages: How Do We Use them?

Moving averages identify trends and trend reversals, give a measure of a commodities’ strength, and help you arrive at support and resistance levels. Essentially, moving averages are indicators with lag, which is to say that they do not identify new trends but are useful in trend following. One of the most useful ways in which you can use moving averages as buy or sell indicators, is to have three moving averages running at the same time on the same chart. The idea is to have a short, an intermediate and a longer term time frame. When the first two move upwards and cross above the longer term one, it indicates an uptrend and one can buy. The reverse happens if the first two move below the third moving average. In that case, you can sell, as the commodity is in a downtrend. A good example of this would be a 10, 20, and a 30 day period moving average, plotted on a commodity chart.

Moving averages are also used by traders to determine support and resistance of a commodity. When the commodity reaches a moving average and struggles to move above it, you might have found resistance. If a commodity stops falling at a key moving average, it can be deemed to have found support. A prime example of this is a 200 day moving average, which is used to calculate long-term trend directions, and to find support and resistance in them.

Types of Moving Averages

There are different types of moving averages. The simplest one is the simple moving average (SMA), which is calculated by taking the normal arithmetic mean of a specified set of numbers. The exponential moving average (EMA) is calculated by giving weightage to more recent data. The EMA is regarded to be a better moving average compared to the SMA. Both of these moving average variants become very useful when used for trend following with moving average crossovers. Indicators such as the moving average convergence divergence (MACD) and Bollinger bands use moving averages as key components. The MACD shows the price divergence of two moving averages, by subtracting a 26 period EMA from the 12 period EMA. A third 9 period EMA is used to give us buy or sell signals when it moves above or below this MACD. Bollinger bands, so named after their creator, use two standard deviations plotted away from a 21 period SMA.

Whichever way you look at it, one cannot deny that using moving averages by themselves may not make you a millionaire in a hurry, but are brilliantly useful in helping you follow trends and plan your commodity trading strategy.

About the Author: David Rivera has traded commodities and options for one of the largest cash trading firms in the world. He currently owns and runs the following websites: Futures & Options Simulated trading: http://www.futuresoptionspapertrading.com Options Secrets course: http://www.deltaneutraltrading.com

Source: www.isnare.com
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Moving Averages - How to Use Them For Bigger Profits
By Sacha Tarkovsky

Moving averages are useful in forex trading but you need to know how to use them correctly.

If you do they are useful for buying into existing trends, but they should never be used in isolation.

Let's see how to use them correctly.

There purpose

Moving averages come in various forms, but they all have the same aim:

To help traders identify trends smoothing out the day-to-day price fluctuations and show the average price over a set period time.

The closing price is simply added up and divided by the period of the moving average.

Popular moving averages

200 Day moving averages are popular for tracking longer trends

20 to 60 Day moving averages are useful for intermediate trends

5 to 20 Days are popular for short cycles.

Which average should you use and when?

They should never be used to identify new trends and never use moving averages in short time periods i.e under two weeks.

A Lagging not a leading indicator

There a lagging indictor in terms of price action NOT a leading indicator.

You should NOT use them to identify new trends does not mean they are not useful.

They are good as a filter for entering existing trends that are moving strongly.

A simple way to use moving averages

For example, a set up we like in a lot of markets is when a trend kicks off the 40 day moving average we view as a line that if broken the trend could be in danger.

We then look for pops back to the 18 day moving average to consider entering trades in the direction of the existing trend.

Moving averages should never be used by themselves.

They should be combined with other indicators i.e. support and resistance or a momentum indicator such as the stochastic.

They can be a very useful tool for entering an existing trend in motion and a warning sign when a trend is ending.

They still have a use

Moving averages are not as popular as they once were - I can remember the 1970s and you could simply trade using moving averages.

Trends in currencies and commodities then, were not subject to the volatility they are today, so they can't be used in this way.

However, as a backup tool for identifying and entering strong trends they can still make a valuable contribution to your trading plan.

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Moving Averages - Simple Tips On Using Them For Bigger Consistent Profits
By Kelly Price

Moving averages are popular and if used in the right way can help you make profits however most forex traders make 2 critical errors which sees them lose. Lets look at moving averages and how to use them correctly for bigger profits.

Moving averages (regardless of the period used) all have the same aim:

They identify trends over specific periods and they smooth out the day-to-day price fluctuations that are a consequence of short term volatility to help you see the longer term trend.

The equation is:

The closing price is added up and divided by the period the moving average is calculated over.

Popular Periods

200 Day moving averages are popular ( particularly in the stock market) for tracking longer term trends and 20, 40 and 60 Day moving averages are used to spot and identify the intermediate trends on forex charts. Shorter Periods are used and many forex traders will calculate moving averages within a day.

Moving averages are one of the simplest and most popular used by traders interested in technical analysis and are a great trend identification tool.

The problem most traders have is using them correctly and they normally make to fatal errors.

1. They are NOT a leading Indicator

Many forex traders use moving averages to execute forex trading signals without any other confirming indicator and this is a huge mistake. They fail to understand that:

Moving averages are a lagging NOT a leading indicator.

They are like a trend line and simply give the direction of the trend in the time period that they are calculated over.

Many currency traders like to buy dips to a moving average to initiate a trade that the level holds but this simply leads to loses. If you hope in any investment market you will lose your equity quickly. Moving averages should not be used as a leading indicator and you should time entry with a momentum indicator such as the stochastic or Releative strength Index to Confirm the level should hold and get the odds on your Side

Moving averages are great for showing you layers of support and the trend but cannot be used to enter forex signals they need to be combined with other indicators - If you do not do this you will lose.

2. Short time periods indicate nothing

The shortest moving average we would use would be 18 days, however we have seen traders using moving averages within a day and plotting them hourly!

Volatility in short time frames is random and there is no trend - day traders who use moving averages lose, not becuase moving averages area bad indicator but simply it is impossibkle to calcualte a trend in short time periods.

Moving averages are a great tool for indicating support or resistance in the market and can add a valuable extra tool to your trading armoury, if you use them correctly:

To identify the trend, support and resistance levels and then combine them with a momentum indicator to enter your trade and finally use periods of a least a week and nothing shorter! It's an easy and profitable tool if used in the right way.

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