Moving averages are likely the first technical indicators most traders learn about. It's amazing how much we can get out of this simple indicator.
For most traders, the moving average is the first technical indicator they learn. It is also the one that they continue to use after they become seasoned traders.
Why is that so?
The moving average strikes an incredible balance between simplicity and effectiveness.
Everyone understands what a moving average is. There is no complicated formula. Yet, it is handy for highlighting market conditions and trade entries.
This guide starts with an overview of moving averages and moves on to cover the standard methods of trading with them.
(You’ll notice that we have a separate section for trend indicators. Moving averages are definitely the classic trend indicator, but there are so prevalent and important to technical trading that we have created this dedicated section for it.)
A basic strategy template is to combine a price pattern with a moving average. It can be a specific candlestick pattern or a generic price behavior like a two-swing pullback. This simple approach grounds your analysis by factoring in price action.
Another typical strategy is to use multiple moving averages. When employing such a strategy, remember that the law of diminishing returns applies. Each additional moving average adds less value to your analysis than the previous one. Place too many moving averages, and you risk confusing yourself.
While moving averages are often touted as trend indicators, it is more versatile than that. When the moving average is flat, it indicates a sideways market. Under such market conditions, mean reversion is a familiar and reliable trading premise. Moving average channels are great for highlighting such trades.
The beauty of a moving average is its simplicity. So please don’t mess it up by complicating things. Keep it simple.
Practice reading charts with moving averages and your trading performance will certainly move beyond the average.
You can zoom in on any strategy that interests you, but I suggest starting with the Ultimate Moving Average Guide for an overview.