What is a Moving Average (MA)?
The moving average is a simple technical analysis tool that will help you understand price data by making a constantly updated average price. Like the constant moving price for $SPOT (image below).
The average is derived from a specific period of time like 5 minutes, 1 hour, 7 days, or any period you choose. What I like about MAs is I can use it for my long-term and short-term trades.
Moving averages are usually used to identify the trend direction of a stock or asset to quickly determine its support and resistance levels.
The longer the time period of the moving average, the greater the lag or delay. A 200-day moving average will have a big delay than a 20-day MA. The 200 and 50 days MAs are mostly followed by traders and investors because they are considered to be important trading signals.
The most common moving averages are 15, 20, 30, 50 100, and 200 days. The shorter the time span used, the more sensitive it will be to price changes and vice-versa.
Predicting trends in the market is not an easy task. However, using our TA and research can help us execute better trades.
How do I use it?
There is no secret. Like everyone else, I use it to help see uptrends, downtrends, and crossovers.
Uptrend is when you see a rising moving average, while a declining moving average is the downtrend. Crossover is similar to uptrend but with a confirmation where a short-term moving average (like MA50) crosses above a long-term moving average (MA200).
For example, $SPOT has been on an uptrend ever since the crossover of MA50 over MA200 and MA100 around May 21 and 28, 2020 (+8 GMT).
Here’s an actual example of an executed trade based on MA and of course a well-timed position based on a piece of breaking news. That’s Technical Analysis (TA) and complimented with Fundamental Analysis (FA).