One of the first indicators that new traders learn about when they start their trading journey is the Moving Average. Moving averages are popular because they smooth out the price data and create an ever-evolving average, thus mitigating the impact of trivial fluctuations in price. Moving averages can be used both as a means of identifying the trend as well as places to take trades.
In this article, we’ll touch briefly on how to select from the different types of moving averages, and then do a deep dive on various ways to use them in your trading on the TrendSpider platform. Let’s jump in!
Types Of Moving Averages
There are many schools of thought regarding which moving averages are best to use. First, there are quite a few different styles of moving averages, including:
- Smoothed, and more.
For the sake of simplicity, we’ll put our focus on the Simple Moving Average, as it’s the most commonly used because it gives an equal weighting to all values contained in its calculation.
Selecting Moving Average Lengths
Next, we need to discuss moving average length. Again, there are many schools of thought here, but if we distill them down, we land on the idea that it’s good to use at least 2-3 lengths, one short (fast), one medium, and one long.
The short length is often somewhere between 3 and 8 periods, meaning it’s taking into account between 3 to 8 candles worth of price data. The short moving average will follow price action closely. The medium length is usually somewhere between 9 and 20 periods. It gives us an idea of the intermediate trend of the price action. Finally, a commonly used length for the longer-term moving average is often somewhere between 30-50 periods.
Ultimately, the lengths you choose are completely up to you, but for this article, we’ll focus our attention on a 5-period for our short, a 20-period for our medium, and a 50-period for our long. Now that we’ve selected our moving average style and lengths, let’s talk through a few different ways to trade them.
One of the first ways a trader can use moving averages to create a trading plan or make a trading decision is by understanding where the moving averages are in relation to price. In an uptrend, price will tend to trade above the moving averages and the moving averages themselves will tend to be in order from fastest to slowest, top to bottom. In the example pictured below, we can see price above the 5-period SMA, which is above the 20-period SMA, which is above the 50-period SMA.
In a downtrend, the opposite is true. Price will be below all of the moving averages, and the moving averages will be in order from longest to shortest, top to bottom. Price will be below the 5-period SMA, which will be below the 20-period SMA, which will be below the 50-period SMA.
If price is not trending up or down, it’s either distributing or accumulating. In periods of distribution or accumulation, you’ll notice the moving averages crossing back and forth and price trading in a range. If you’re trading using your moving averages as signals to get into or out of trades, it’s often easiest to let these sideways periods resolve before placing a trade.
When trading using moving averages, it’s also always a good idea to understand what is happening on bigger time frames. Oftentimes, traders will use even longer moving average lengths (100-period, 200-period, etc.) to determine the longer-term trend. If the longer-term trend is down, it will generally be more advantageous for a trader to short into strength than to buy into weakness.
If the longer-term trend is up, it will generally be wiser to go long into weakness than to short into strength.
Going through these steps before placing trades can most certainly increase the probability of a successful trade. Now let’s talk through a few more ways you can use the moving averages!
You’ve made it halfway. You deserve a prize!
Trading Moving Average Crosses
One of the first things that new traders learn when it comes to trading moving averages is buying and selling on the cross. When a shorter length moving average crosses up on a longer length moving average, that’s usually considered more bullish. If price is trading above both moving averages when they cross, that will give you even more confidence to go long.
When a shorter length moving average crosses down on a longer length moving average, that’s usually considered more bearish. In this instance, we’ll also look for price closing below both moving averages to give us a bit more confidence in going short.
Trading Moving Average Cross Levels
Still another way to trade the moving average crosses is to observe the level at which they cross. In some instances, these levels can act as support or resistance to price during pullbacks or extensions. For example, note the bullish crosses occurring in this chart. Yellow lines have been drawn at cross levels. Price extends to the upside after the cross, and when it corrects it has a tendency to find support at the level on which the moving averages crossed.
This same idea works during downtrends, as well. In the chart below, you’ll note the yellow lines that correspond with the moving averages crossing down. Price makes its initial move lower, and then when it corrects it finds resistance at the level that moving averages crossed.
Harnessing The TrendSpider Platform
Now that we understand different ways to develop bias as well as take trades using moving averages, let’s talk through a few key ways to utilize the TrendSpider platform to streamline your trading of these ideas.
Let’s say, for example, you’d like to scan for stocks that are meeting the criteria of a ‘Bullish Uptrend’ that we defined above. Remember, in this scenario, we’re looking for price above the 5-period SMA, the 5-period above the 20-period, and the 20-period above the 50-period. In order to script that, the conditions would be written as follows:
If you’d like to add this scanner to your account, simply click this link, choose ‘Login & Import’, and then ‘Subscribe’.
For the ‘Bearish Downtrend’ scenario, the conditions would be written out as follows:
Again, if you’d like to add this scanner to your account, simply click this link, choose ‘Login & Import’, and then ‘Subscribe’.
Finally, if you’re looking for a few different moving average crosses, those can be written out like in the image below. Do note that this particular script is looking for the 5-period crossing either up or down on the 20-period.
You can add this scanner to your account by clicking this link.
Each of these links will send you to the Market Scanner, but you can take the conditions that are written within the scanner, and save them as a script via the ‘Script Actions’ button. To do that, click the ‘Script Actions’ button and choose the ‘Save As Template’ option.
From there, the ‘Script Manager’ will open, you can re-title the script and then save it. Once you’ve done that, the newly saved script can be loaded into the Multi-Factor alert, the Strategy Tester, and even the Trading Bots to send signals to your broker to get into and out of trades!
We hope you found this blog helpful to your trading process, but for those of you who learn better by watching videos, all of these concepts are discussed in the video below!