Moving Averages: How a Pro Use Them in Trading Routine
How to Trade Moving Averages Like a Pro – Moving averages is a technical analysis tool to calculate price data points by creating average price within specific period of time. Trading professionals usually use moving averages to get more profit. They use them as momentum indicators, instead of resistance and support indicators. How it works? Check the details here.
Types of Moving Averages: SMA, EMA, WMA
There are many types of moving averages which you can see in every platform chart. You need to understand all of the types before using them, but with only these 3 types of moving averages, you can get what you need in trading routine.
Simple Moving Average (SMA)
SMA is, like the name, a simple calculation where you add up the most recent five daily closing prices then divide by five to create a new average.
Exponential Moving Average (EMA)
EMA is a calculation where the most recent value has a greater weight. For example, when the usual flat price suddenly rises, the level of EMA will be higher than SMA.
Weighted Moving Average (WMA)
WMA or also called as LWMA (Linear Weighted Moving Average) is also calculated where the recent value get more weight. While the EMA is only giving more weight to the most recent sample, the weighting on WMA is more proportionate within the data series.
All of the types above can be used to any time period of prices (opening, closing, low or high). Closing price is typically often to be used because it gives a great weight of samples where the price usually has been settled. This closing price then also becomes the next opening prices. The key moving averages which usually the target of most of traders including 20 EMA, 50 EMA, 100 SMA, 200 SMA, and 200 EMA
How to Use Moving Averages as Momentum Indicators
Indicate the Trend Exist
The professional traders use moving averages as momentum indicators by determining if the trend is exist and the strength of it. If one strong trend exists, then it is the best edge used by retail traders. You can start to look at the slope angle of moving averages. When the upward trend has a strong move, then the traders will look at the 20 EMA angle. And when the angle is consistent and strong, it means the trend is exists.
Follow the Crosses Back Momentum Indicators Direction
You can also use moving averages crosses as momentum indicators. You need to look if a faster moving average is positioned above the slower one or not, then start to implement on multiple time frames. It works like this: You can get a good opportunity when the higher time frames show you a good trend but the pull back on the lower one. You can follow the trend direction of cross back as momentum indicators at the same higher time frames direction.
Disadvantages of Moving Averages
Firstly, the moving averages are calculated by previous data not nature predictive, so the results can be random. Next, the main problem is when the uneven price action comes then the price may turn up and down causing the trend reversal. The moving averages usually have a poor condition in wavy or ranging conditions.