As a trader, you need to excel at the two technical indicators that are very simple to implement but most powerful. These are the trendlines and the moving averages. These two technical indicators can be used with a naked eye by only eyeballing the chart. They work for all markets. While calculating the moving averages, the period of time used to calculate the regular is extremely important. The shorter the time period, more fluctuations and whipsaw. What this signifies is the chances of getting wrong trading signals increase with shorted time periods.
The Moving averages is sub-divided into simple, weighted or exponential. In the case of simple, all the prices are treated equally whereas in the weighted and the exponential averages, recent prices are given more weight so that these averages are more tuned in to the recent prices as compared to the old ones. These averages are inclined to smooth out the amount action that is more easy to interpret and understand.
But, longer period of time averages move slowly with a smoother curve that can be slow in giving trading signals for entering into a long or short position. Now many traders use a mixture of slow and fast moving averages in generating trading signals.
Most traders use the mixture of three averages. Futures traders use the combination like 4,9 and 18 period averages. Stock traders use longer periods like the 40 day, 100 day and 200 day to generate trading signals. When the little while average crosses the medium one, this gives a trading signal but this have to be confirmed. Confirmation is obtained when the short and the medium move above the longer period average.
When employing moving average crossovers as a technical sign, you should be long when the short average is above the longer period average. And when it is below, you should be short. The crossovers of these short and longer averages provide the trading signal to act as they indicate that the momentum is shifting from one direction to another. Moving average crossovers are an important tool in the arsenal of any trader. Moving Average Convergence Divergence (MACD) one of the most frequent indicator depends on them.
Nevertheless, when trading with these crossovers, you should know this that these averages are lagging indicators. What this means is that they’re giving a signal about earlier times price action something that has already came about. These averages work very well in a trending market but do not suit non trending or choppy markets.
Mail this post
Posted in 
Tags: 
