The Moving Average is one of the most popular trading indicators, and it is considered by most professional traders to be lagging and give late signals. However, there are several more accurate methods to use the moving average, that produce high win rate signals on many Forex pairs, stocks and commodities. We will know describe those methods in this article.
Method #1: Bounce Method
The first method for profiting with the moving average allows us to enter trends at high win rate locations, without being lagging and with high reward (and low risk). The method is simple to follow: you need to wait until the moving average is sloped (indication that the trend is strong), and then wait for price to touch the moving average and bounce in the opposite direction. After this occurs, we enter a trade in the direction of the bounce.
This trading method gives very good signals and allows smart traders to join the trend right before it continues, so the stop loss is small and the reward is much higher.
Method #2: Identifying Trend or Range
The moving average has another trait that smart traders use in their trading to separate periods of trend and range. Range is a market condition in which price bounces from support and resistance levels without a clear sense of direction. In ranges we will take counter-trend trades without attempting to “ride trends”, while in trends we will look for accurate locations to join the trend.
The moving average can help us separate between the two periods with its angle: If the moving average has a steep angle it is a sign that the market is trending strongly, and if the moving average is flat it is a sign of range. We highly recommend you separate your trading between those two conditions and have a different system for each of these periods.
Method #3: Long Term Trend
Another use of the moving average is to determine the long-term trend and filter your trades accordingly. You can use a 100-period moving average to find out the long-term trend, and enter only trades in this direction for higher win rate.
Steve Sollheiser is a writer and a stock trader. Visit his site StockChartPatterns.org for more articles about trading chart patterns.