(Yes / No)
Yes – Moving averages are a very popular technique that allow professionals to make money by making the same prediction more often than not. For many, when it comes to trading, not using moving averages can be detrimental to their financial positions and is considered one of the biggest mistakes to make on the market. Moving averages are also used to simulate patterns on charts and for the purpose of chart patterns and other trading patterns.
There are two main methods of using moving averages to trade, with each having pros and cons in it’s purpose.
A. Simple Moving Averages: A simple moving average is used by all traders; these are just simple averages of the past close, but the formula for calculating the moving average, which allows the calculation is very simple and straight forward. If you do the math out of the box for basic moving average and your closing price is 1.2 you will end up with:
[1.2] – 1 = 1.2
The formula for calculating your moving average is:
The more moving averages you have, the more often you’re going to get the same closing price.
B. Moving Average Shifts: This is when traders use moving averages to attempt to get a better view of the market. One of the many moving average filters traders use include the percent change (aka the MACD or the MACD Moving Average). If you’re doing a lot of trading on multiple exchanges a MACD is a useful tool to have because it will allow you to get a better view of any movements of the different exchanges.
While traders have been using the percent change moves to evaluate the market with moving averages, a few professional traders also use the percent change moves to analyze their positions. For example, at one time or another professional traders have always used the percent change in their moving averages to evaluate their positions in order to make trades that were better or worse for them. When you do this you’re using the moving averages as the filter to see different positions better.
C. Average Excluding the Percent Change Moves: When you’re done using moving averages, and your closing price is 1.2 (or even 1.3) you can also use the average excluding the percent change moves. The average excluding the percent change moves is actually a slightly different method than the first method, as it only uses the closing price from the last 10 trading days to determine the closing price used to calculate the percent change, which we will look at later.