Moving Averages — The Most Basic Tool for Reading Trends
Those curved lines on a chart are moving averages. They may not be flashy, but they show trend direction very intuitively, making them a foundation of almost every strategy.
What Is a Moving Average?
A moving average connects the average closing prices over a set period. A 20-day average is the average of the latest 20 candles. It filters out minor price fluctuations to reveal the broader trend.
SMA vs. EMA
| Type | Characteristics |
|---|---|
| SMA (Simple) | Gives all periods equal weight. Smooth, but slow to respond. |
| EMA (Exponential) | Gives recent prices more weight. Responds quickly and is preferred for short-term trading. |
Golden Cross and Death Cross
- Golden cross — A short-term average crosses above a long-term average → a signal of a shift to an uptrend.
- Death cross — A short-term average crosses below a long-term average → a signal of a shift to a downtrend.
※ This is a lagging indicator, so signals arrive late. Be careful of frequent false signals, or whipsaws, in sideways markets.
Using Moving Averages as Support and Resistance
When prices pull back in an uptrend, they often bounce at the 20-day or 60-day average. These are viewed as pullback buying opportunities.
When the trend breaks, a moving average can switch from support to resistance.
When the trend breaks, a moving average can switch from support to resistance.
Practical Combinations
- Use moving averages to establish trend direction and RSI to help time entries.
- The basic approach favors longs when averages are stacked in bullish order (short-term > medium-term > long-term), and shorts when the order is reversed.
- Areas where several moving averages converge can become points of explosive volatility.
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