Moving averages can be used in allot of ways effectively. They can be used to determine Reversals, ie golden cross and death cross. Your time frame and trading style should dictate the length of the averages you use whether it's 20/50, 50/200 or custom. ie If you short term trade and hold a position a week - 2 months you should use shorter term avgs; if you are more of an investor then the 50/200 may be more suitable. Moving Averages can be used to determine Direction and Strength of trend. ie In an uptrend the shorter average will be above the longer average and price will be above both averages. When the width between the two averages expands the trend is getting stronger; conversely when the width is shrinking the trend maybe getting exhausted. Likewise you can use averages for effectively identifying good Entry and Exit Points. ie If looking to enter a trade (uptrend) and you see price trading way above the short term average (topping or above normal top) you should anticipate a pullback in price, a reversion to the mean; compare to Overbought conditions. You may want to wait to get long or if already in a long position, you may consider taking profits. Conversely, if price drops below averages you may want to cut losses. Averages can also be used to see what Stage a trend is in, whether it's in its beginning stage or somewhere in the middle or possibly near the end. Trends have Legs which is drawn by the averages thru expansion and contraction, and a good long trend may have 3 or 4 legs before maybe getting near Exhaustion and possible Reversal or Sideways market (consolidation). In a consolidating market averages become moot. Keep in mind when a market consolidates that means buyers and sellers are uncertain of future direction, there is a pause. The longer the consolidation usually means a more wound up market, thus a bigger breakout one way or the other! Finally, moving averages are used as Support and Resistance. In addition to horizontal S&R levels. ie In an uptrend price will have a tendency to pull back to the average and Bounce off it or the average may play catch up to the price. In conclusion, you should always be aware of where price is in relation to the moving averages and the historical patterns and tendencies of the stock or indice you are trading. Learn the animal and what makes it tick! All holds true likewise in down markets (down trend) but obviously flip-flopped.
I look at a 1 period moving average on the first bar of the day and a 2 period moving average on the second bar of the day and a 3 period moving average on the 3rd bar of the day. I do that dynamic adjusting of the MA on each new bar of the day and call that a VWAP and then I plot price deviations from that VWAP and trade off those levels.
This is a great answer on how to use moving averages! I have a couple of questions: 1. When you say wait for a candle to close and then enter on the next confirming candle, would you wait for the 2nd to close? For example if price crossed the MA from below and closed above it, would you then see if the next candle closed as a bullish candle and then enter a long trade? 2. What would regard as higher timeframes for a moving average strategy? 1 hour and up or is that too low? Many thanks.
Thanks for the heads up on Elher's, only problem is I cannot see his adaptive MA's on any platform I use. I totally agree with you that they are lagging indicators and this is their biggest problem. To overcome some lagging effects, I think that it's better to look at when price closes above or below an average (1 or more) as there is less lag.
Thanks, this sounds very interesting, have a few questions if you don't mind: 1. What made you go for the 34/144/610 rather then the more traditional 20 50 100? 2. Can you please expand a bit more on this "I'd go down to M15 and buy/sell into the first pullback onto them." 3. Can you please explain what you mean by issuing Bollinger bands to check if they have crossed their deviations? Thanks.
1. They are all Fibonacci numbers, I got the values from another trader and they worked well enough. The important thing to keep in mind is that whatever MAs you are using, they should be separated a factor of say 3 or 4 times the value of the other. I believe 20, 50 and 100 are simply too close together. 2. If the averages were aligned on the one hour chart, I'd go to the 15 minute chart and if they were also aligned, I would buy/sell when price interacted with the 34 moving average. 3 - The bands served as a simple margin of error (0.25 deviations), so I would wait for the actual MA and these deviations to finish crossing each other.