How to Choose a Moving Average to Trade With
A trader can choose a moving average based on the time frame that he is trading; the trader might choose to use this indicator on the minute charts, hourly charts, day charts or even weekly.
The trader can also choose to average the closing price, opening price or median price.
Moving average is a commonly used device to measure strength of trends. The data is precise and its output as a line can be customized to ones preferences.
Using the moving average is one of the basic ways to generate buy and sell signals which are used to trade in the direction of the trend, since the MA indicator is a lagging and a trend following indicator and this means that it will tend to give late signals as opposed to leading indicators. However, as a lagging indicator it gives more accurate signals and is less prone to whipsaws compared to leading indicators.
Traders choose the moving average period to use depending on the type of trading they do; short-term, medium-term and long-term.
- Short-term: 10 -50 MA Period
- Medium-term: 50 - MA 100 Period
- Long-term: 100 - MA 200 Period
The period in this case can be measured in minute chart, hourly charts, day charts or even weekly. For our example we will use 1 hour period.
Short term moving averages are sensitive to price action and can spot trends signals faster than the long term ones. Shorter term moving averages are also more prone to whipsaws compared to long term ones and a trader should choose a period that will generate a signal early but not give too many whipsaws.
Long term averages help avoid whipsaws, but are slower in spotting new trends and reversals.
Because long term moving averages calculate the average using more price data, it does not reverse as fast as a short term one and it is slow to catch the changes in the trend. However, the longer term moving average is better when the trend stays in force for a longer time but may also give late trading signals.
The work of a trader is to find a moving average period that will identify trends as early as possible while at the same time avoiding fake-out signals (whipsaws).