Moving Average Trading Strategies
KEY TAKEAWAYS
Three ways to trade with moving averages are moving average crossovers, support & resistance levels, and moving average ribbons
Crossovers can help identify entry and exit points
Support and resistance levels help identify turning points in trends
Moving averages are among the most popular technical indicators traders and investors use. Talking heads mention them on financial media channels. You can find moving averages on popular financial sites and in just about every stock charting software. Even fundamental analysts apply them in their analyses.
But how do you use moving averages to exit and enter trades? There are different ways to trade with moving averages. We'll explore how to make entry and exit decisions with moving average and/or price crossovers, utilize moving averages as support and resistance levels, and identify trends and/or trend reversals using moving average ribbons. Moving averages are easily incorporated into platforms like SharpCharts, StockChartsACP, or P&F charts.
Why Use Moving Average Trading Strategies?
The financial markets can be complex. Sometimes, a simpler approach to understanding market activity can be more efficient and effective than complicated analytical methods. This is where moving average-based strategies can come into play.
Simpler Trend Analysis
Moving averages can help eliminate market noise, making it easier to interpret and analyze market direction.
Versatility
The difference in approaches—crossovers, support & resistance levels, and MA ribbons—offers multiple ways to identify potential entry and exit points. This allows you to choose various methods that best fit a market opportunity.
Dynamic Support and Resistance Levels
Moving averages dynamically adjust based on new price data. This makes support and resistance more fluid and adaptable to changing market conditions.
Visual Cues on Trend Strength
Moving averages, in relation to price or other moving averages (e.g., ribbons), can provide a graphical representation of trend direction and strength. This information can be helpful when making trading decisions.
Trading Moving Average Crossovers
Two popular ways to use crossovers are price-to-moving-average and moving-average crossovers.
Price Crossovers
Trading with moving averages can be helpful to trend traders. When the price crosses above a moving average, it could be bullish. When price moves below a moving average, it could be considered a bearish signal. But a lot depends on what moving average you use and if that price crossover is a follow-through move.
You've probably heard the adage, “The trend is your friend until it bends.” Based on this premise, you could combine a price crossover with the major trend so your trading aligns with the trend.
Learn More. How To Trade Price-to-Moving Average Crossovers
Moving Average Crossovers
Moving average crossovers occur when one moving average crosses another. Say you have a 50-day simple moving average (SMA) and a 100-day SMA overlaid on your price chart.
A bullish crossover is when the shorter moving average crosses above the longer one; in this case, it's when the 50-day SMA crosses above the 100-day SMA, called a Golden Cross. A bearish crossover, or a Death Cross, is when the shorter moving average crosses below the longer SMA.
Moving average crossovers can also be used for short-term trading. The 5-8-13 EMA crossover is a popular strategy among short-term traders. The crossovers between the three exponential moving averages (EMAs) can indicate price moves in the near term.
Support and Resistance
Moving averages can be used as support and resistance levels. You may notice that prices often bounce off a moving average. The moving average is acting as a support level. Sometimes, prices are reluctant to move beyond a moving average. That's when a moving average acts as a resistance level. Traders often use the levels to identify entry and exit points.
Moving Average Ribbons
When you plot a bunch of moving averages on a price chart, the appearance resembles a ribbon moving across the chart. You can use Moving Average Ribbons to identify long and short-term trend direction, trend strength, and trend reversals.
The width of the ribbon, that is, the distance between the moving averages, also helps to identify trend strength, the end of a trend, and the beginning of a trend.
There are different ways to apply Moving Average Ribbons. The Guppy Multiple Moving Average is a popular method which combines 12 exponential moving averages.
Last updated
