19. How toTrade Moving Averages Like a Pro Part 2

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In our last lesson we looked at the two main types of moving averages, the simple moving average and the exponential moving average. In this lesson we are going to look at some of the ways that traders use moving averages to pick their entry and exit points in the currency, commodities, and equities market.

As moving averages are lagging indicators they tend to work well in identifying and following a trend and not to work well in ranging or trend less markets. Because of this traders will often use them to trade with the trend as well as to identify potential areas of support or resistance which may result in a continuation or reversal of a trend.

Lets look at some examples:

The most basic way that traders will use moving averages is to identify and then trade with the trend of a particular instrument. Although most traders will probably want to use the moving average in conjunction with some of the things that we have learned so far and some of the things we will learn in future lessons, the most basic way to trade using just the moving average is to buy when the price of a financial instrument breaks above the moving average line and sell when the financial instrument breaks below the moving average line. For confirmation traders will often wait for a full bar to close above the moving average line before entering long and a full bar to close below the moving average line before entering a short position.

Example of Trend Following Using Moving Averages:


A second way that traders use moving averages is to identify areas of support or resistance and then trade the break of these levels, looking for a potential reversal of the trend. When a financial instrument has shown a particular moving average level to be significant from a support or resistance standpoint in the past by testing the moving average line several times, and then breaks that level, traders will often see this as a warning sign that the trend is reversing and position themselves accordingly.

Example of Trading Support and Resistance Breaks Using Moving Averages:

The last way that traders will using moving averages is by plotting a longer term moving average and a shorter term moving average on a chart and trading the cross over. The idea here is that the shorter term moving average will be faster in identifying changes in the trend and therefore traders will look to get long when the shorter term moving average crosses above the longer term moving average and short when the shorter term moving average crosses below the longer term moving average.

Example of Moving Average Crossovers:




That completes this lesson. You should now have a good understanding of how many traders trade moving averages. As always if you have any questions or concerns please feel free to post them in the comments section below, and have a great day!

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[Humble71918]

Hello there,

I am a newbie on this Forex trading and lost 600 dollars in two weeks as I am not quite familiar with all the terms and strategies, based on data happened this week, and being the fact that I am losing 40 dollars WITH BUYING THE BASE CURRENCY in pair USD/JPY, what would you recommend me to do? stay or leave?

[InformedTrades]

For traders who are new to the market and have not yet developed a strategy they are comfortable with I think most would agree that the best thing to do is papertrade and then to start with a small account and build up when the trader becomes more confident in their skills and strategy. Hope that helps. Best Regards, Dave

[wojtek0000]

excellent teacher. covers all the bases clearly and concisely.

[InformedTrades]

Thanks for the comment and for watching I am glad you like the video. Best Regards, Dave

[wojtek0000]

how is it a 50-day moving average when its a monthly chart?

[InformedTrades]

Hi, The chart of Goldman is a daily chart it is just zoomed out which is why you see the months along the bottom. Best Regards, Dave

[hewauk]

you are a star dave

[Sconz32]

Just found these videos and are ripping through them and learning a lot. Thanks for taking the time to put them up. They are excellent.

[GonG108]

@Humble71918 LOL , the only answer should be GET OUT or start to think over what you are going to tell your wife , lol

[toddelong]

I am confident that adding levels of additional technical analysis to this strategy should improve the ROI, but I have been hard pressed to find an example where trading moving averages alone will result in "losing your shirt.”

QUESTION: Could you please provide real world example where employing this strategy alone, in fact, lost money.

Oh, and BTW, I love your videos. They have been a great help to me and my investment club. I hope you still take the time to respond to posts.

[toddelong]

In reading years of posts below, I have a nagging question There seems to be a general consensus that moving averages alone would not be an effective trading strategy. I took devulsky's challenge and picked 10 random stocks and back tested 12 months using a 50-day simple moving average "Buy/(close short position) when price breaks above and sell/(& short) when it crosses below" the moving average and provided you have chosen a stock with price volatility, this appears to make money.

[emrepl]

i cant use ema without rsi,stochastic and macd

[SesyyyTravisaa303]

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[eyeonwashparish]

Subscribed. Thanks for these video. I'm new and in education phase right now and noticing Moving Averages can say a LOT.