There are many advantages to using a moving average (MA) in your trading, as well as options on what type of moving average to use. MA strategy is based on an analysis of price data to define constantly updated average price. The average is taken over a specific period of time. Moving average strategies are also popular and can be tailored to any time frame.
At the direction of the moving average to get a basic idea of which way the price is moving. If it is angled up, the price is moving up. If it is angled down, the price is moving down.
A moving average can also act as support or resistance. In an uptrend, a 50-day, 100-day or 200-day moving average may act as a support level, as shown in the figure below. This is because of the average acts as support. In a downtrend, a moving average may act as resistance.
On the price chart, the moving average line provides types of signals for a change, resistance or support. The indicator is used to define the level of resistance or support, depending on where is the price at the moment. To obtain high-quality signals, use a moving average with a long time frame. However, you should be cautious with the timeframes for different assets. For example, on the USD/CAD pair, the moving average has a period of 30.
The algorithm of moving average strategy:
- Add SMA tool to your chart as a tool. Set a period to 30;
How to add SMA
How to set SMA
- Wait for the signal. The price line will be reaching the line of a simple moving average;
- Buy a call option after the second candle.
Buy a Call Option
When the shorter-term MA crosses above the longer-term MA, it’s a buy signal, as it indicates that the trend is shifting up. This is known as a “golden cross”.
Meanwhile, when the shorter-term MA crosses below the longer-term MA, it’s a sell signal, as it indicates that the trend is shifting down. This is known as a “dead/death cross”.
The algorithm of moving average strategy:
- Add the SMA indicator to your chart. Set a period of 30;
- Wait for the current candle to close under the line of a simple moving average;
- Buy a put option when the next candle appears and closes under the SMA.
Buy a Put option when a Price and a Simple Moving Average Cross
Crossovers are one of the main moving average strategies. The first type is a price crossover, which is when the price crosses above or below a moving average to signal a potential change in trend.
In general, SMA is quite easy to use. Charting software and trading platforms do the calculations, so no manual math is required to use a moving average.
Moving averages are calculated based on historical data, and nothing about the calculation is predictive in nature. Therefore, results using moving averages can be random. At times, the market seems to respect MA support/resistance and trade signals, and at other times, it shows these indicators no respect.
