Are you analysing charts without long-term moving averages on your chart?
You might be missing out on collecting useful information in a simple manner. The long-term moving averages (MAs) provide a wealth of analyses, from key bounce and break spots to understanding the larger trends.
This article explains the main benefits of applying long-term MAs, and why these are key for trading purposes.
Identifying the Long-Term Trend
Price charts can sometimes be confusing for traders. Large corrections could make traders lose track of the trends and the overall picture. They get distracted by the many ups and downs that price action can create...
The long-term MA's help traders keep their focus. Traders can quickly understand whether a trend is present by adding a long-term moving average (MA) to the chart. The MA also identifies the direction of the trend.
Here is the main summary of using moving averages for the trend:
- Trend is present → price action is far away from the long-term MA.
- Long-term MA has bearish angle → downtrend.
- Long-term MA has bullish angle → uptrend.
- Trend is retracing → price action is retracing back to the long-term MA.
- No trend is present → price action is oscillating around the long-term MA.
The long-term MA keeps traders on the right side of the financial markets. It helps traders avoid risky reversal setups and allows them to enter setups that are keeping with the trends.
Source: MetaTrader Supreme Edition EUR/USD 1H chart from 18 May to 7 June 2018
Key Decision Zone: Bounce or Break Spot
The trend is not the only advantage for using long-term moving averages. Price tends to respect and stop at the long-term MA levels.
The MA levels are key and critical decision zones for either a trend continuation or larger reversal:
- If price breaks the long-term MA, then a reversal is likely.
- If price bounces slowly at the long-term MA, then price can break both ways.
- If price bounces strongly at the long-term MA, then a trend continuation is likely.
The reaction of price at the long-term moving average is certainly valuable information to take into consideration. Of course, it is best to take other factors into consideration as well such as well tops and bottoms, Fibonacci levels, and other indicators to find confluence of support and resistance.
The more confluence, the more important a decision zone becomes. This in turn means that the breakout or bounce will have more value and can be considered more important.
Traders can trade these breakouts and bounce by, for instance, waiting for Japanese candlestick patterns to indicate whether a bounce or breakout is occuring. Traders can judge whether the candle pattern is interesting for a trade setup or not.
Source: MetaTrader Supreme Edition GBP/USD 4H chart from 3 April to 13 June 2018
Which Are the Best MA Levels?
Most traders tend to use MAs around 100 to 200 period for the long-term. The MA could be both an SMA (smoothed moving average) or an EMA (exponential moving average).
Popular MA settings are often around levels such as 100, 150, and 200 period. Some traders also use Fibonacci sequence levels for MA's such as 89, 144 or 233 period.
That said, short-term and medium-term moving averages remain important too, but for different purposes. The short-term MAs are best used for determining momentum, support, and resistance zones. The medium term MA's are useful for assessing retracement and correction targets.
Short-term moving averages are anything between 0 and 20 MA, whereas medium-term MAs are usually between 20 and 100 MA. These settings can, of course, vary from trader to trader, but this is a general rule of thumb.
Many traders in fact add all three types of moving averages to their chart:
- One moving average around 5-20
- One moving average around 20-100
- One moving average that is 100+.
The advantage of applying all three moving averages to the chart is that traders are able to get a full 360 degree view on various angles. However, this article aims to primarily emphasize the importance of long-term moving averages for analysing the charts.
Of course, make sure to use these ideas explicitly via financial instruments, but only once you have completed your own proper analysis first. This is a supportive method of analysing the charts. Always test these ideas first, through a demo account of course, before applying them to a real account. Another key tool is the Metatrader Supreme Edition, which offers 60+ extra features.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand therisks.