The Moving Average is undoubtedly the most popular technical indicator in trading. Fairly simple, yet effective it can help you a lot if used wisely.
The indicator has several modifications. The most popular are Simple Moving Average (SMA) and Exponential Moving Average (EMA). The difference between the two is that EMA gives greater weight to more recent prices.
How to use Moving Averages in your trading strategy?
The most common use of Moving Averages is to determine the direction of a trend. As e general rule, if the current price chart stays above a MA, there is an Uptrend, while if the price is below, there is a Downtrend.
A lot of traders consider the levels of Moving Averages when looking for support and resistance levels. Fairly common is the use of the 50, 100 and 200-days moving average as support and resistance levels for long-term trends. The 200-days MA is considered by many especially important in stock trading. A popular rule of thumb is that as long as the 50-days MA is staying above the 200-days MA, the trend is bullish.
Another very popular technique is “Crossover”. In this approach, you add two different period moving averages. One of them is a short period, the other one is long period. When the short-term MA crosses over the longer-term one, you have a bullish signal (buy). Respectively when the short-term MA crosses below the long-term one, you have a bearish signal (sell).
As mentioned above, popular long-term MA periods are 50, 100 and 200. For short term time-frames, the popular moving averages are 5, 10, and 20. Some traders, who are fans of Fibonacci numbers, prefer 5,8,13,21 and 55 and instead.
There is no “right” time frame and period when using this indicator. The best approach is to test different time frames and periods and find out which ones work best within your trading system. For example, a very basic “Crossover” trading system, popular among long term Position Traders, is a combination between 10, or 20-day MA and 50-day MA. On another take, a lot of intraday traders use the 10-day MA as guidance while looking at lower time frames.