Moving average trading is a strategy that identifies trends and reversals. Day trading as well as swing trading can benefit from moving averages. The most popular simple moving average lines are the 50 sma, 100 sma, 200 sma and the most popular exponential moving average lines are the 9 ema, 13 ema, and 20 ema. Since the market relies on the bulls and bears battling it out, you can use moving averages to find momentum as well as support and resistance.
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Moving Average Trading Explained
Moving average trading has many different tools at its disposal. As a result, this is something new traders and even seasoned ones should study up on. Our trading service is here to provide you with the tools to learn trading.
Moving averages are lagging indicators. This means they can’t predict new trends but can be used as confirmation once the trend is in place.
Price trading above moving average lines are considered bullish. However, if price trades below moving averages then price is bearish. This is helpful for trend trading.
You shouldn’t rely on just moving averages to confirm a trend. You also need to know how to draw out your own trend lines. The trend is your friend hence being able to map out trends and channels.
Moving average trading uses momentum by using 3 moving average lines in tandem. You can determine momentum by how the 3 lines form in conjunction with each other.
As a result, they need to be moving averages of different time frames. For example, the 9 and 20 exponential moving average lines along with the 50 and 200 simple moving averages confirm trends, momentum and give buy and sell signals.
Support and Resistance
Moving average trading uses the different moving average lines as support and resistance. If price is falling, it usually stops at a key moving average line.
However, trading isn’t always textbook perfect. Price may break the moving average line and continue to fall. If that happens then you can feel pretty confident that a short play or put option is a good bet. Make sure to learn stock market trading before trying to short a stock or trade options.
Once price has broken the support level of the moving average, it turns into resistance. If that level holds then it becomes a key resistance level.
At that point, you should watch to see if price can break above it and hold.
You can see on this chart for GE that the 200 SMA is a huge resistance level. Once price broke below, it tested it numerous times without breaking it. Price has since fallen at least $10 and hasn’t recovered.
Simple Moving Averages
Moving average trading uses simple moving averages. Simple moving averages smooth out volatility. By doing this, it’s easier to see a price trend.
The more the SMA points up, the more bullish price is. The more it points down the more bearish the price. Looking at it that way seems pretty simple.
The longer the time period of a chart, the smoother the volatility will be. If you have the SMAs on a short time frame, there’s a lot more volatility because it’s reading the data quickly.
Which Moving Average Is Best for Day Trading?
- Here are the best moving average lines for day trading:
- 9 exponential moving average and the 9 ema.
- Or use the 13 ema in place of it.
- VWAP is also a very important intraday line.
Exponential moving averages are another piece of moving average trading. The exponential moving averages place much more significance on the most recent data points.
In other words, they’re used for the recent price movements. Exponential moving averages are the most popular of all the moving averages.
Since moving averages are lagging indicators, they must be used correctly. If not, then they can wreak havoc on trades.
EMAs place more emphasis on recent price movements so they act much quicker. You often hear day traders talking about getting into a trade when price breaks above the 9 EMA and holds.
As long as price is riding the 9, they stay in. When price breaks below the 9, they tend to close out a trade.
Strategies
Moving average trading employs different strategies for stock trading. The most popular one being crossovers. Moving average crossovers are a favorite among traders.
The crossover removes all emotion from the trade. Trading is an emotional game. Greed and fear move markets.
If you can’t get your emotions under control while trading, you’re going to fail. As a result, 90% of traders fail and give up.
Even the best traders fail 30-40% of the time. Knowing and following all the strategies doesn’t mean you’ll never lose.
However, crossovers find changes in momentum. These can be found on the 1 minute chart all the way up to the daily, monthly and weekly charts.
Swing trading crossovers can be quite lucrative. The golden cross and death cross are the 2 most popular crossovers. They’re formed by the crossing of the 50 and 200 SMAs.
The golden cross occurs when a short term moving average line (50 SMA) crosses over a long term moving average (200 SMA). This is a pretty strong buy signal.
The opposite is also true. The death cross is the 200 SMA crossing above the 50 SMA. That’s a very bearish signal.
The 9 and 20 EMA crossovers are also another good bullish and bearish sign to heed. If the 9 is above the 20 then things are bullish. However, if the 20 crosses over the 9 than bearish things are in store.
The Bottom Line
Moving average trading is used to slow down volatility as well as acting as support and resistance, trend confirmation and momentum changes. Be sure to use moving averages in tandem with candlesticks and patterns for the complete picture.
If you need more help, take our swing trading course.
