Trading is a challenging enterprise that offers market participants the promise of instant financial gratification or humiliation. Financial market traders need a clear head and a suite of analytical tools to help them understand when a market is trending or ready to change direction. The business of analyzing markets and using leverage to profit from the persistent fluctuations and undulations in market prices has been made possible by advances in personal computer technology and the development of sophisticated technical analysis tools and indicators. The balance of this exposition is committed to the examination of the moving average indicator, and important and popular financial market trading tool.
How Moving Averages Work
Moving averages are lines on a price chart that track the average price of a financial asset over a specified number of time periods. Such time periods could be hours, days, weeks, months or fractions of an hour. Each bar or candle on a price chart represents one time period. Moving average lines are used by traders to smooth out “noise” generated by short-term price volatility. Moving averages provide traders with a good sense of previous and possible future price trends. The most basic type of moving average attributes equal weight to all of the time periods in a range of data. Others attribute greater weight to the most recent data points.
Moving Average Crossovers
The most elemental use of moving averages is to apply two or more to a chart in order to observe how they interact. Moving average crossovers are an integral part of many common market trading systems. When one moving average line intersects or crosses over another, the event may signal an important change in market momentum or trend. A moving average crossover system employs at least two moving averages, a slower-moving version, and a faster-moving version. Faster moving averages consider price action measured over a shorter period of time and are, therefore, more reactive to the most recent price changes. When a faster moving average line crosses over a slower moving average line from south-to-north, the event may signal a new bullish trend. When a faster moving average line crosses a slower moving average line from north-to-south, this crossover may signal that the market is ready to sell off.
For traders of any financial asset, understanding the direction of a trend and the power behind it is paramount. Moving averages are a powerful weapon to use in this undertaking. Experienced traders use long-term moving averages to inform them of the prevailing long-term trends and very frequently trade only in harmony with them. To do this, they may employ a 200-day moving average which will, by necessity, take into account data going back many weeks and months. A simple glance at a 200-day moving average line may be all one needs to discover if the current market trend is rising or falling. An alternative application would include drawing two moving average lines of different durations. If the shorter-term (faster) moving average line is positioned above the longer-term (slower) moving average line, then one can assume that the prevailing trend is up. If the slower moving average line is positioned above the faster moving average line, one can assume that the market is in a downtrend.
Support and Resistance Lines
Support is an area on a chart where evidence of demand can be seen overwhelming selling pressure thus halting a price decline. Resistance is the opposite of this. It is an area on a chart where supply can be observed overwhelming buying pressure thus halting a price advance. Traders everywhere use support and resistance lines to help them determine where and when to enter or exit a market. The ability to accurately draw support and resistance lines on a chart is an important skill that can take time and experience to develop. Moving averages often act as dynamic support and resistance lines helping the novice trader better understand the concepts of support and resistance. The best part of this is that these lines are at all times drawn up for the trader by the software’s moving average indicator.
Introducing UltraTrade Online Trading Platform
When trading the markets online, smart traders rely on both fundamental and technical analysis to make better trading decisions. To this end, it is critical for today’s trader to know how to read and understand charts. UltraTrade is owned and operated by Sharp trading LTD. It is an integrated, web-based trading services company (brokerage) that provides a platform for FOREX trading and the trading of indices, equities, commodities and other global financial instruments. UltraTrade broker administers an online trading academy that gives first-time traders a foothold into learning the basics of charting and technical analysis. The academy provides investors and traders with important information about moving averages, what they are, and how they are used by various market participants to make money in the markets.
To be sure, moving averages can never be the “holy grail” of trading that all market speculators seek. This does not mean that they do not have their uses. Trading systems that employ moving averages are helpful to traders by giving them the confidence to know when and where to enter and exit a trade. They can also be used as a money management tool. Crafty veterans know enough to place their buy and sell stops just above or below moving average lines. Used systematically and consistently, moving averages will, most of the time, keep the disciplined trader on the right side of major market moves.