The moving average is one of the most popular technical indicators. It is applied in stocks/forex/crypto trading and proved its high level of efficiency. There are hundreds of trading strategies based on MA. In this post, we will discuss the 4 most popular ways to apply the moving average.
1️⃣The first method is applied to identify the market trend. While the price keeps trading above the MA, one considers the trend to be bullish and looks for buying opportunities. Once the price starts trading below the MA, the trend is considered to be bearish and a trader is looking for shorting opportunities.
In the example above, Moving Average is applied for showing the identification of the market trend. Its upward climb signifies that the market is trading in a strong bullish trend.
2️⃣The second method applies the combination of 2 MA's: preferably a long-term one and a short-term one. The point is that once a short-term moving average crosses above a long-term MA, with high probability, it signifies the initiation of a bullish trend. Alternatively, a crossover of short-term and long-term MA's to the downside indicates a start of a bearish trend.
In the example above, there are 2 Moving Averages: short term and long term ones. Their cross signifies the bullish trend violation and initiation of a bearish trend.
3️⃣The third method applies MA as a structure. While the moving average is lying above the price, it is considered to be a dynamic resistance. Staying below the price, it serves as a strong dynamic support.
Perceiving MA as the structure, one applies that for trade entries. In the picture above, Moving Average is applied as support on GBPJPY and the price starts growing after its test.
4️⃣The fourth method is aimed to track the crossover of the moving average and the price. The idea is that a bullish violation of the MA by the price gives an early signal for a possible trend reversal. While a bearish breakout of the MA by the market indicates a highly probable bullish trend violation.
In the example above, the crossover of the moving average and the price is a perfect indicator of coming bullish and bearish movements.
Backtest different MA's inputs and learn to apply that for predicting the future direction of the market and for trading it.
Let me know, traders, what do you want to learn in the next educational post?
Thanks for simplifying using the MA/EMA in a very simple way...
But i think you forget to mention one thing which is really helpful for the new traders that the timeframe of the crossover / price above MA or below MA is very crucial to catch the target without having another EMA/MA hanging up act as resistance / waiting to touch below EMA/MA which act as a support.
For instance, in down trend scenario in 1hr time frame, using 3 ema, 21,50,200 catching a price reversal from a support of 1hr, to a 1m resistance, 200ema will act as the target for BUY opportunity.
Thanks once again... You may cover this bit on part 2 of your blogs, Using MA/EMA as your target..