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How to use moving averages to know what's going on when you trade

by , 27 November 2015

When you trade, knowing the overall trend is important. One of the easiest ways you can find out is to use moving averages.

So how can you use moving averages with your trading?

Read on to find out more…


Using moving averages

 
Moving averages are a great technical analysis tool to help you find out what the market or the asset you trade is doing.
 
You can use moving averages to find trends to trade. You can also use them to help you find out what the trend is.
 
Moving averages can also help you find out when a market has changed its trend.
 

Moving averages in action

 
Say you decide to use a 30 day moving average. The moving average will show you the last 30 days’ worth of closing prices divided by 30.
 
What you get is a smoothed out trend line. It irons out all the daily ups and downs in an asset’s price. 
 
Have a look at the chart below. This shows you the 30 day moving average (in green) and the 100 day moving average (in red).
 
 
Chart of moving averages
 

By using two moving averages you can get a better idea of what’s going on. Use one shorter-term one and one longer-term one, like in the chart above.
 
When you see moving averages cross over on a chart, it can be a buy signal or a sell signal.
 
For a buy signal, you’re looking for the short-term moving average to cross above the rising longer-term moving average, explains Frank Hemsley in Profit Watch.
 
For a sell signal, you’re looking for the short-term moving average to fall below the declining longer-term moving average.
 
So there you have it. How to use moving averages to know what’s going on when you trade.
 
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