Moving averages in trading
The main rule to use the medium optimally furniture at the operational level is to find the intersection between the prices and the average, and in particular, when prices cut the moving average to the upside, it generates a bullish signal; when prices cut the moving average line down, the operating signal is selling.
Moving averages, especially if calculated on large time spans are useful in monitoring the trend of price bottom. Alone are not sufficient to take a statistically valid trading strategy due to some major defects. The first flaw is that although the moving average is an invaluable tool in identifying effective immediately the changes taking place in the market is still a tool characterized by a lag in providing useful operating signals, both incoming and exit from the market . The delay in providing these signals means that it can not take full advantage of every market movement.
Furthermore, the moving average tool allows to better exploit the phases and periods in strong trend, while generating false signals in the bounce and descent phases which develop inside the lateral consolidation phases.
There are several implemented operational strategies, depending on whether you use a single average two or more averages moving averages.
When you try the trading approach through a single medium it is necessary that the same is appropriate arc reference time: it is necessary that the average is calculated with a restricted time horizon for the short term trading, such as daily, and instead it is calculated at longer horizons if the type of trading has taken a position trading.
The signals and the false signals with the use of a moving average
We have already said that the signals that you may have are of two types: when the price crosses the average from the bottom to the top you have a typical purchase signal (buy); when the price crosses above the average down, the operating signal to follow is to sell (sell).
In general, especially in intraday level, prices perform the sudden jerking upward or downward moving average but the signal is then confirmed by the closing price. In this case, you should pay attention because there may be a sudden turnaround.
The operating trading via two moving averages
To avert this problem can be useful to resort to the use of two moving averages. In this case the signals supplied will have a higher predictive value as are obtained by observing the intersection of the middle of the latter and not with the prices.
The buy signal is given from the intersection from the bottom to the top of the faster moving average (for example at 8 period fast -21 period slower ) short time frame (50 / 100 periods -200 days) for long time frame
The sell signal it has, on the contrary, when the average faster pierces from the top down the slower one.
This method reduces the motions made by rapid ascents and sudden descents, dampening the danger of false signals.
The use of the three moving averages to optimize the timing and operability on the market
If we try to assist the signal provided by the two medium with a further medium it is considerably reduces the risk of false signals and prevents open positions are contrary to the trend in prices. In this case, it is necessary to open a long position only when the average faster crosses, from the bottom to the top, the slower one. The position will be closed only when the average faster crosses, from top to bottom, the second medium (and not the slower one). At this point it is better to stay out of the market because it is only with the top cross down the fast average with the slower you can go short, having a clear bearish signal.