Moving averages have multiple uses in technical analysis, but can be particularly useful as a trend filter when analyzing trades. This article covers the concept of moving averages and takes a closer look at how indicators can be used to identify strong trending environments.
Identify new trends
There is often an uncertainty period at the moment immediately following a low or high pattern when the price starts to trade in the opposite direction. This can cause a lot of confusion in the minds of traders as it is not yet clear if this is a fresh start. tendency Or the price that breathes before continuing in the direction of a previous trend. Moving averages can help here.
For a general exploration of moving averages and how to calculate them, see ‘Moving Average (MA) Explained for Traders‘
The content and concepts described below apply to both long-term and short-term trading.
consider EUR/USD chart below. It is unclear whether this is the early stage of a new trend or an inconsistent price action that could lead to a lasting decline.
To get a better idea of the trend, traders can incorporate: 200-day simple moving average, also known as 200 DMA. 200 DMA is widely regarded as a powerful trend filter because it uses a significant amount of data (price points) in its calculations.
200 DMA Simple Moving Average (SMA) However, traders looking to attach greater importance to recent price action may be drawn to exponential moving averages (EMAs).
Find out the difference. SMA and EMA ~ ByDiscover It will better suit your trading style.
200 DMA should be considered as a trend filter entry signal. Therefore, a potential entry should only be considered when the price moves above 200 DMA. The example below highlights this concept as the price moves above 200 DMA several times before falling.
Entry criteria may vary from trader to trader as it depends on trader preference. In this example, the bullish bias was established with a price trade above 200 DMA (trend filter) with a rebound. support (200 DMA) followed by a recent swing high.
So, to feel the trend, find a price above 200 DMA and then take advantage of it. technical analysis Identify potential entry levels. Finally, the trader is healthy Risk Management Techniques Implement a positive reward risk ratio.
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How to use 200 DMA to keep trades
Once a trend is identified, it is important to manage your trades over time. Ideally, traders want to keep trading as long as the trend continues. So more clarity is needed to gauge whether the trend is still intact or a potential reversal is unfolding.
200 DMA can be used as ‘dynamic support’ in an uptrend. The trend is valid as long as the price continues to trade above 200 DMA.
A move below 200 DMA could be a sign that the trend is slowing or is actually reversing. At this stage, traders can consider a potential exit if the limit has not yet been triggered.
Advantages and disadvantages of using MA for trend trading
As with all indicators, there are conditions under which moving averages thrive and under conditions. The table below summarizes the pros and cons of using moving averages for trend trading.
|flexible (A more responsive MA can be produced by reducing the number of days/duration observed)||delay indicator (There is usually a lag between the strong initial movement and the period when the price is trading above 200 DMA)|
|large data sets (Considering the 200 price range)||Volatility or Volatility Markets (Signals are inappropriate for markets that are not trending.|
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