Trying to understand the basics of technical analysis for the first time can be a difficult endeavor. The sheer amount of trading indicators and tools that are available these days often feels intimidating for new traders. Trying to figure out what concepts are actually useful and easy to grasp is a rite of passage for all traders. That’s why lots of traders start with learning how to use moving averages. A moving average can be defined as the average price of a security for a specified time period. They are normally plotted on a chart to provide visual insight into the price of a security and where it is going.
Moving averages offer a straightforward way to perform technical analysis and are a great building block for trading skills. They are one of the most widely used indicators in technical analysis for quite a few different reasons. It’s an indicator that can provide us with a fairly simple way to interpret trends and find opportunities to buy, sell, or short a security. If you are on the fence about incorporating moving averages into your trading or simply don’t understand why it is a valuable indicator, you owe it to yourself to learn a little bit more about them. Let’s take a look at the benefits of using moving averages in trading below.
Benefit #1 – It’s a Simple Indicator
Perhaps the best reason to use moving averages in your trading is that it is a simple indicator. You can take a look at a moving average line on a chart and instantly recognize which way the price of a security is heading. By combining multiple moving average timeframes, you can even determine the strength of a trend. If you notice that a security’s moving average is angled upwards, that means that the price is moving up. The opposite is true for downward angles of the moving average of a security. One of the big issues for a lot of new traders and using indicators is that a lot of them are difficult to understand. Moving averages are great because they really aren’t all that complicated to comprehend.
Benefit #2 – Compelling Trend Analysis
Since moving averages offer a simple way to minimize the noise in the market, it’s the perfect option for trend analysis. You can even use two moving averages to confirm changes in a trend. For example, when a short-term moving average crosses below a long-term moving average, you know that the trend is undergoing a change. If you notice that both the long-term moving average and the short-term moving average are heading in the straight direction, the trend has a lot of strength. If you aren’t using moving averages in your trading, it’s going to be a lot harder to recognize a trend reversal. Reacting too late to a reversal is usually a costly mistake in the trading world.
Benefit #3 – Helps with Entry Points
It’s also important to note that moving averages are a great indicator for finding trade entry points. Finding the right entry point on a trade that provides you with a great risk to reward ratio is something that a lot of traders struggle with. Moving averages can help you find a good entry point. You can often time use moving averages as either buy or sell signals depending on how close they are to their moving averages. They also act as support for stocks and can be used to find good entry points for trades and swing positions.
Tips for Using Moving Averages in Trading
If you are interested in using moving averages to help your trading decisions, keep in mind that there are multiple timeframes you can choose from. Traders also typically either use a simple moving average or an exponential moving average to make their decisions. It all depends on how long you are planning to hold a position and what your goal is with the trade. As you get more and more familiar with moving averages, you will start to figure out which timeframes work best for your trading style.
Keep in mind that there is no such thing as the perfect indicator. Even though moving averages can be helpful for determining trends and provide us with intriguing trading setups, you can’t base a trade solely on a moving average indicator and expect to be profitable every single time.