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When to use the Moving Average
The moving average will probably be one of the first technical tools that you come across in the early steps of your trading journey.
In very simple words, this useful technical tool can help you identify the direction of the market, so whenever you’re feeling lost, you can just add it to the chart and watch the magic happen.
Just to remind you that the market may have 3 possible directions:
- Up
- Down and
- Sideways
So, when prices move above the moving average line then it is considered an upward move or uptrend in technical analysis lingo.
Also, when prices move below the moving average then it is considered a downward move or a downtrend, and when there is a strong trend in either direction the moving average tool can be pretty helpful.
Have in mind though that it doesn’t provide literal predictions, and therefore is considered a lagging indicator. In simple words, it’s an indicator that suffers from a delay in identifying the signals.
The period is one of the moving average parameters, and this basically means how many prices it will consider in each calculation.
For example, if the period is 50 then it will average the last 50 prices, and if the period is 200 then it will average the last 200 prices.
The longer the period of the moving average, the bigger the lagging factor is, and the more the delay in the signal.
But once again, in a trending market, the moving average will work pretty well!
Wondering which period you should use though?
Well, good because we’ll be covering this in our next article!
