Moving Averages are a great tool. I’m not going to go on and on about them. It is part of my tool belt but something I rarely use anymore. Many people can sustain a good income playing them. And I’m not knocking their value and effectiveness. Utilizing them as part of your trading system is great if you know how to use them effectively. I highly suggest for people to use them if they can figure out how.
The main use of MA’s (8,20,50,100,200,300), is support and resistance.
“When the price action stays above the 8/9 ma, it is a sign of a rally.” AskBucky.
As a quant I also understand that they are calculated averages. So when it applies to your chart where your candles sit, those lines will run with the price action because they are averaged prices during that time of day based on some history. It is a really kewl tool to use. In the same vein, person pivots and Fibonacci lines. Mathematically, they are valid. What is interesting, is that they always match up with price levels. So in the spirit of KISS, I do without them. I just use levels. But that is me.
What is more meaningful to me is how levels are lost and gained. With levels you gain the actual mechanics of candlesticks. A thorough understanding of levels give you where the candles will try to go and where they will bounce or be repelled. Those are in the same manner that people utilized pivots, moving averages, poc. They all do the same thing, just different names and different rationalities. Regardless, the root is levels. How do scalpers scalp with accuracy? Levels.
See a long term level always manifest itself over and over again. You will always notice opens, closes and tips over and over again. What is also most interesting is they are usually spots of consolidation. So why complicate your life with fibs, ma’s, pivots, poc’s and what ever else if you can gain the same and even cleaner understanding if you use levels.
Another use of Moving Avergages for me is the MACD. The macd is an oscillator that is known as a lagging momentum indicator. With the macd and comparative analysis, you gain a confirmation of accumulation and distribution. Effectively, it becomes a leading indicator.
The problem with MACD is people don’t really know how to use it. They don’t even know how it works with consistency. The problem is they don’t know what the underlying it is really using. Seems funny but go to any website talking about them including StockCharts.com, StockCharts.com MACD Definition, scroll down to the drawbacks. Proper use and interpretation of the MACD negates all of these drawbacks.
I especially love this one
“As a security increases in price, the difference (both positive and negative) between the two moving averages is destined to grow. This makes its difficult to compare MACD levels over a long period of time, especially for stocks that have grown exponentially.“
It has nothing to do with price. If they can’t explain why I think this last statement is laughable and can be negated, remember 2 words. “Casual Empirical” And then run.
I love how people suggest to play the cross over the MACD. While generally it is true to go long when the fast is above the slow, and short when the slow is above the fast. Many of you know how disastrous that worked out. The reason it didn’t work, you didn’t know what is really going on when they cross over. If you come across someone who will tell you to play the cross overs without explaining how to do it without killing your account, get the hell away from them.
Divergences of the MACD are awesome to play, but again you will need to understand what the market is doing and why even on negative divergence, the price is still moving up. Well because the fast is above the slow, is not gonna cut it.
So in closing the only use of MA’s that I like is within the MACD. It takes a lot of study to understand how I use it, but I’ve given enough examples in this website to guide you. Casual Empirical is lazy. Think like a quant and learn what the underlying really is.