Moving Averages

Moving Averages are trend following indicators that show lines representing a smoothened lagging average of price past action. There’s many types, but typically a simple or exponential moving average is used. The most important setting is the time frame. They are typically used in multiples of 5 or 10. Most frequently used settings are 5, 20, 50, 100, and 200. Higher periods have less noise, but are slower to give crossover signals.

20 Moving Average = Bright Blue
50 Moving Average = Pink
100 Moving Average = Green
200 Moving Average = Purple

Trading systems based on moving averages use crossovers to generate potential trade indications. A single moving average crossover system waits for price to cross the single moving average to generate a trade. It goes long when price crosses the moving average up, and short when it crosses down. Single average crossover systems are more prone to whipsaws. Double moving average systems wait for a short term moving average to cross a longer term moving average. This helps ensure there is an active trend. If the shorter average crosses up, buy. If the shorter average crosses down, sell.

Note that you can have either consistency or sensitivity with moving average crossover system. Shorter distances increase sensitivity and give earlier entries, but they are more prone to whipsaw signals. Longer distances have decreased sensitivity and give late signals, but they’re more likely to be accurate.