Tag: moving averages

  • Moving Averages As Support and Resistance Levels

    Moving Averages As Support and Resistance Levels

    Moving Averages As Support and Resistance
    Finding the key support and resistance levels is a crucial component of trading. Moving averages can help.

    By Guy Avtalyon

    Is it possible to use moving averages as support and resistance? How can they help us in trading? Is there any trick on how to use them? We know from the previous article that moving averages are an average of closing prices during the recent days. How much info we can use in the meaning of moving averages as support and resistance levels?
    If you take a look at any chart with moving averages and trend lines that are formed you’ll understand why this is the subject. Moreover, this understanding may have a great impact on your profit.

    Moving averages as support and resistance are extremely powerful and we’ll show you why and how.

    What are the moving averages as support and resistance?

    First of all, these levels are not just like conventional support and resistance. Conventional, traditional levels are visible as horizontal lines in your charts but these provided by moving averages are dynamic. They are changing according to the recent changes in price.

    Dynamic support and resistance levels are zones where the market could pull back into and get support requiring to be at horizontal support or resistance levels. Why is it dynamic? Because it measures resistance and support using moving averages that are changing as market changes.

    You can find many forex traders that use moving averages as support and resistance levels. For example, it is common among them to sell when the price increases and reaches the moving average and tests it. As a forex trader, you cannot ignore when the price often checks out the moving averages before it bounces back. You must understand that something is happening when the price reaches these levels. 

    What happens is the market is developing, evolving. So you can’t always buy or sell at previously outlined levels. Also, trends’ momentum is dynamic too due to the order flows. Momentum can often be the primary forcing power of trends or movements.

    But to sum what we had here. So-called static support and resistance levels are horizontal and can’t move. On the other hand, dynamic support and resistance levels are moving and they are not horizontal. 

    What causes support and resistance?

    When a price goes up and down, it faces obstacles on the way. If obstacles act in a way to prevent the price to drop lower, we are talking about – support. Hence, when it stops the up progress, it is resistance.

    Support is formed when more traders are selling than buying. Sellers will usually cover their short positions and take the profit. The price will go lower and lower. As it happens, buyers will start to buy at that lower price and many of them will enter the new long positions. If the number of buyers is bigger than the sellers, they will create a support level eventually. But if the price moves up that means the more traders are buying and if the number of sellers is bigger than the number of buyers it is so-called resistance.

    How moving averages help to find support and resistance levels

    The question is how do we estimate the strength of the signal we’re seeing. Is it breakout or bounce? There are moving averages as support and resistance levels on the scene to help us. One of the benefits of using moving averages for this purpose is their ability to be handy even when the market price is going through a hidden area in our charts.

    Have you ever had trouble finding key support and resistance levels when looking at the charts? Of course, you had. It is pretty much usual that when looking at charts and notice a price action, you see the price is pulling back but you cannot find support or resistance levels in that zone. But if you try to reveal how the market is valuing dynamic levels, your charts will be more clear. Moreover, you’ll find some trading opportunities you were missing before. That’s kind of an “angle-changer”. You have one perspective more to judge your trade.

    One of the best ways to estimate the ability of support or resistance levels is to watch price action around them. It isn’t hard to read price action. For example, on candlestick charts it’s easy. 

    For example, if you use the 15-minute chart and the price rises to the 50 EMA. That could be a really good dynamic support or resistance level. You’ll notice that every time the price touches 50 EMA and tests it, you’ll see a bounce back down because the price uses this moving average as resistance. Try it, it’s simply amazing. But the price will not always perfectly bounce back from the moving average. Sometimes it will go a bit above before it starts going back in trend direction.

    Sometimes the price will simply explode through it all together. Some forex traders usually leap on two moving averages and buy or sell when the price is in the middle of the zone between the two moving averages.

    Does this really work?

    The logic behind why moving averages as support and resistance work are very similar to why price moves. Let’s say that the majority of traders use 10-days, 20-days. 50-days, 100-days or 200-days moving averages. So, what do you think, what can happen when almost 90% of them use all these five? Nothin special. But if they choose to use only one of them in expectation for it to operate as support or resistance? Yes, you’re right. The price will respect that. When more traders expect something to happen and they have a common goal, it will happen.
    Let’s examine this in the case of 10 and 20 EMAs that are providing support and resistance. What can you see?

    Can you see how the 10 and 20 EMAs are providing support and resistance?  These moving averages can be a powerful help but only if used with the right assembly factors. Let’s look at a setup where they unite several other factors.

    Can you see how the pin bar marked in the red circle rejected the 10 EMA and a key price action level both? We have a clear uptrend without resistance beyond this key level. This was an example of a great setup. Feel free to test it.
    The price will rarely bounce exactly, again, and again from the same moving average. Instead, it’s more efficient to form a support or resistance zone between two moving averages.
    When the price moves into the zone between the 20 MA and 50 MA, we should ask if a reversal is going to happen. That could be a danger zone, so it may be smart to hedge the position.

    How to use moving averages to lock in profit

    If you want to lock in profit, move up your stop level in your trend-following trade only if you have a clear signal of bounce from moving averages you use as support or resistance. That is one of the tricks for using moving averages as support and resistance. But you have to keep in mind that moving averages as support and resistance levels are just saying to us what’s going on at these levels. We still have to look out for additional signals and find them. 

    The truth is that if you add MAs you’ll have additional in-trade information that may help you to maximize your trades. But like everything in Forex, you’ll have no guarantees. Consider these averages as a tool in your trading toolkit that you can adopt and use to increase your trading success.

  • How To Use Moving Averages In Trading Stocks?

    How To Use Moving Averages In Trading Stocks?

    How To Use Moving Averages In Trading Stocks?
    Many traders tried to use the SMA to predict the sell or buy options on a chart. You can pull this off by using various averages for triggers.

    By Guy Avtalyon

    Moving averages are one of the most popular trading tools, so let’s see how to use moving averages in trading stocks. Some traders have great knowledge about it but some still make it wrong. The latter might have an extremely great influence on trading success and traders’ confidence in this strategy. But actually it’s a great strategy if you know how to use moving averages in trading stocks.

    Our aim is to show you exactly that and how to avoid mistakes. We’ll show you how to choose the type and length of the moving average. Also, we’ll show you how to use moving averages in trading stocks and how they can help you to make trading decisions.

    Which moving average to choose? 

    Not a small number of traders will ask what moving average to choose, EMA or SMA. To evoke. EMA is an exponential moving average while SMA is the simple moving average. There are not too many differences between these two but if you choose one or other that can make a difference in your trading result.

    The main difference between EMA and SMA is speed. Moving average EMA will always move much faster and thus will change the direction before than SMA. Hence, EMA is capable of faster recognizing the stock price change. On the other hand, SMA would take much more time to turn when the stock price changes.

    But you cannot conclude which is better based on their speed. How is that? EMA acts quickly when the stock price changes direction, which means it’s more sensitive. When something is sensitive it’s at the same time more vulnerable. That’s the reason why EMA could send a wrong trading signal. Simply, it reacts too soon.

    For example, if the stock price starts to go down, the EMA will begin turning down promptly and it will indicate a change in the direction too early. What if it is a short-term living change? What if it is a false signal? So, we’ll need to watch the SMA. It moves slower thus it provides a more accurate signal. 

    Well, it will be nice if so simple but it isn’t.  If you trade according to EMA only, you’ll be at risk to enter a trade too early. Also, if you use SMA only there is another problem because you might enter the trade too late. There is an additional benefit to using SMA. During the volatile markets, its signal is less wrong.

    How to trade with the SMA?

    SMA is a generally accepted technical indicator, as we said. Do you remember how we use it in school? It’s similar.
    By using SMA you’ll be able to recognize the strategy that will work for you. In the beginning, here is the formula and later we’ll show you how to use moving averages in trading stocks.

    The SMA formula is the average closing price of a stock over the given periods. So, add all closing prices on the particular stock during the week, for example, and divide the result by the number of days (a trading week is 5 days long). This may look like this for 5 days:

    (19 + 20 + 22 + 18 + 21) / 5 = 100 / 5 = 20

    You can calculate SMA for 10 days, 15 days, 50 days, etc. It’s simple math. Well. all indicators are based on math.

    With SMA, you cannot do whatever you want. It is important to use the most practiced SMAs, not some unnatural 33-days, for example. That cannot beat the market. Traders use 10, 15, 20, 50, 100, or 200 SMAs every day. And you have to know what is interesting for other traders, what they are looking for.
    The point is, the shorter the SMA, the more signals you will get. For instance, if you use 5-days SMA use it along with a longer SMA because you’ll need a proper trigger for your trade, not an indicators’ noise. Short-term traders will use SMAs for up to 20-days. 

    How to use moving averages

    The right question is how to make money with SMA. Find stocks that are breaking out or down but it has to be done strongly. Use SMAs, test them all, to recognize which setting carries the best price. Now, when this is done, let the price test a particular SMA, if done successfully you’ll have a confirmation of the trend. Enter the trade on the first following bar.

    Also, you can use two SMA to fade the primary trend. You’ll have to be positive that the stock price didn’t touch 5-days or 10-days SMAs in the latest 10 bars. The price should close below or above both SMAs but in the opposite direction of the primary trend in the same bar. Enter the trade on the first following bar.

    These are two approaches: with the trend or fade the trend when trading with SMA.

    How to use moving averages EMA?

    The EMA is maybe the oldest indicator of technical analysis. The EMA strategy is helpful to identify the prevailing trend in the stock market. When executing your trades, EMA will provide support and resistance level to do that. The exponential moving average strategy works in all markets and in any time frame, actually. It is a line on the price chart that uses a math formula to help you smooth out the price performance. The EMA formula pays more attention to the recent stock prices. As we said above, it’s faster.
    The EMA helps to reduce the noise of daily price action and shows the trend but also,  perfect in determining future changes in the market price.

    How to calculate the EMA?

    Use the SMA as the start-point for the EMA value. Let’s assume we want to observe 20-days. So, we’ll need to calculate the SMA for 20 days. On the first next day, the 21st day, we have to use SMA from the prior day as the first EMA.

    The calculation for the SMA is simple since it is the sum of the closing prices during a chosen period, and divided by the number of results obtained for that period. For instance, a 20-day SMA is the sum of the 20 closing prices for the last 20 days and divided by 20. Further, you must calculate the multiplier for weighting the EMA. Here is the formula

    (2 / (number of results + 1)). 

    In the example of the 20-day average, it looks like this:

    2/(20+1) = 2/21 = 0,0952

    Let’s calculate the current EMA.

    EMA = closing price x multiplier + EMA (prior day) x (1-multiplier)

    The EMA puts a higher weight to recent prices, while the SMA gives equal weight to all values. The weighting is higher for a short-period EMA than for a long-period EMA. 

    EMA strategy

    Use one moving average with a long period and one with a short period to remove subjectivity from the trading.

    Draw on your chart 20 and 50 EMAs. Do it precisely to be able to identify crossover when it occurs and wait for the price to trade above 20 and 50 EMA. The area between 20 and 50 EMA should be retested twice or more times. If two tests are successful and successive that means the market has sufficient time to develop a trend.

    We hope you can now understand how to use moving averages in trading stocks. They are fundamental for strategies based on technical analysis. If you use moving averages in combination, you’ll be able to predict both short-term and long-term stock price movements.
    How to use moving averages in trading stock more? Use them to define levels of support and resistance.
    Stay tuned, that will be the next topic.