It is important to understand how to read a moving average. The line generated by the moving average indicator is a collection of price data gathered over the span of previous days. For example, the line generated by the 50 EMA is the average price of a currency pair based on the highs and lows of the pair over the last 50 days.
Moving averages are an important tool to determine a trend in the market, and to determine support and resistance zones to enter a trade. Moving averages are important because they indicate trend direction & support/resistance levels. There are two main types of moving averages:
A moving average (MA) is the simple moving average over a predefined amount of time.
An exponential moving average (EMA) applies more weight to recent prices over a predefined number of days.
I prefer to trade using EMA’s. For example, a very popular exponential moving average is the 50-exponential moving average. Your charting software will plot the moving averages for you. All you need to know is how to use this indicator to trade. When the moving average is sloping up, we have an uptrend; when the moving average is sloping down, there’s a downtrend. On an uptrend the moving average acts as a support level. On a downtrend the moving average acts as a resistance level.
You should buy/sell when the price is “near” the moving average and not when price is further away from it. The further the price is from a moving average, the more likely it is to be “overbought” or “oversold”.
When looking at the charts, you will notice that the price doesn’t always find support or resistance in the averages. Many times price movements are random, but there are certain situations in which the price pattern is predictable and repeatable. You should only place a trade when you see a price in a certain predictable pattern. Let’s take a look at both an uptrend and a downtrend with EMA indicators.
On an uptrend, you want to buy when the price is near a moving average support, or when the price just bounced up from the moving average. When price gets too far from the moving average, the price tends to snap back down towards the moving average. When the price goes too far from the moving average, it will eventually snap back because it is overbought.
On a downtrend, you want to sell short when price is near the moving average resistance, or when price just pulled back from the moving average. When the price gets too far from the moving average, the price is oversold, which means that it tends to snap back up towards the moving average. When the price goes too far from the moving average in either direction, it will eventually snap back.
Plotting Moving Averages
Now you will learn to plot these on your own chart. Type “EMA cross” into the search bar for TradingView. You should see a few options, but click on “EMA Cross.” Now exit out of the indicators search bar. You should see two lines which are the exponential moving averages. If you look in the upper left hand corner of the candlestick chart, you will see where it says “EMA Cross (x, xx)”. If you select the setting icon, you can change the inputs and the colors of the lines. You can add multiple “EMA Cross” indicators to see additional inputs simultaneously. I add multiple EMA cross indicators to my chart so I can see four different inputs. My recommendation is that you use the following exponential moving averages:
● 9 EMA
● 26 EMA
● 50 EMA
● 100 EMA
Even though you can use whatever moving averages you prefer, these are the ones used in my strategies. This is not financial advice and you are welcome to experiment and see what works best for you.
An important note to make with moving averages is that they are used for different purposes. For example, the 9 and 26 EMA’s are used primarily for short-term crossover trades; the 50 and 100 EMA’s are used primarily as support and resistance zones while also providing us important information about the larger trend.
When EMA’s are all ascending and far apart from each other, this can be indicative of a strong uptrend. When the candlesticks start to close underneath the 9 EMA, price will start to change direction. If you can see candlesticks dip through the 9 EMA, then the price will touch the 26 EMA to search for support. In an uptrend price will use the 9 EMA as support and if that fails then the next support level will test the 26 EMA. When candlesticks can’t find support along EMA lines, those EMA’s will start to consolidate and eventually cross. When EMA’s cross it is often a sign of trend reversal (but now always).
It is advisable to use exponential moving averages in combination with other indicators like the RSI and our Nitros Bull indicator to find a quality trade entry. Later when we do some live trades for you all, we will look at EMA’s to see how they can be implemented into our trading strategies. Be sure to keep up with our blogs and social media to stay informed about our live broadcasts. We often go live on YouTube and alert our audiences on Instagram, Facebook and Twitter.
Written by Edward Gonzales © Crypto University 2021