Moving averages have multiple uses in trading, which is one of the reasons why they are so popular. It is quite probable that moving averages are one of the most popular analysis tools available. They can be used just to understand a trend in the market or more specifically to place trades and set stop losses.
Once you have decided which moving average you should be using, either simple, weighted or exponential (see earlier post) and you have decided the time period which is suitable for your analysis, draw the moving average on the chart.
You can apply one or more moving averages to any price chart in MetaTrader 4. Simply follow the instructions:
Add indicators icon > Trend > Moving Average
Insert > Indicators > Trend > Moving Average
Once the moving average is on your chart you can start to use it to trade.
There are a few simple points to remember when trading using moving averages which make up the basics.
Price Crossing the Moving Average
When the price crosses above the moving average this is considered a buy signal. When you see this on the chart you could expect to see the price push higher and may want to consider placing a buy order.
When the price crosses below the moving average this is considered a sell signal. We would expect the price to fall, therefore we would consider placing a sell order.
Use of Moving Average For Support & Resistance
When the moving average is showing an uptrend, the moving average is below the market price. The moving average offers a form of support to the price. If the price moves towards the moving average, there is possibility that it will hit the moving average and bounce higher. This is the moving average acting as a support. To place a trade, you may wait for the price to hit the moving average (the support), wait for confirmation and then place a buy trade.
Alternatively, when there is a down trend, the moving average is above the above the price and can act as a resistance. In this scenario, you would wait until the price rises to the moving average, wait for confirmation that it will bounce off and place a sell trade.
Crossover of 2 Moving Averages
In this method you draw two moving averages onto the chart, one with a longer time frame than the other. When the shorter time frame moving average moves above the longer one, it indicates a change of trend – expect an upwards trend. You therefore could look to buy the market.
Alternatively, if the shorter time frame moving average moves below the longer one, this is an indication that the trend will change to the downside and under these circumstances you could look to place a sell trade.
It doesn’t matter which moving averages you use; the principal remains the same.