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How to Use the Moving Average Indicator?

Adam Lienhard
How to Use the Moving Average Indicator?

As a trader, having access to effective tools is crucial in understanding price movements and identifying profitable entry and exit points. One of the most widely used indicators is the Moving Average, which not only helps determine the overall direction of price movement but also gauges its stability. Here are four ways you can use it for your trading.

Determine the direction of price movement

You can understand the current price trend by observing how it moves around the Average. 

An upward trend is indicated if the price is above the Moving Average. A downward trend begins when the price breaks below the Moving Average and moves below it. Essentially, being above the Moving Average signifies an upward trend, whereas being below it signals a downward trend.

Place support and resistance levels

The Moving Average can act as a support or resistance level for the price. If the value of the MA  is significant, it can hinder the price from progressing further.

In addition, when the Moving Average is near the support or resistance level, it further solidifies their strength.

Enter and exit trades

You can identify entry and exit points by using MAs because they signal the beginning and end of a movement. When the price breaks the Moving Average, we initiate a trade. If we wait until the price reaches the next Moving Average with a higher value, we can effectively end the trade.

Determine the trend stability

When the asset price hovers close to the Average, it indicates a stable movement. However, if the price strays from the average, this could signify a weakness in the trend. In such cases, a corrective movement in the opposite direction may occur or a sideways movement may begin.

Use more than one indicator

Many traders consider using multiple Moving Averages to be the optimal approach. Typically, three Moving Averages with varying values are utilized. The ideal trading signal is obtained by waiting for the price to break through all the Moving Averages and for a cross to occur between them. The values 7-10-50 are the most widely used, along with 5-13-55.

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