HOW TO USE THE MOVING AVERAGES TO IDENTIFY THE TREND

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Are you using Moving Averages to understand the trend direction? It’s a good idea because the Moving Average is a fantastic trend indicator.

Many strategies using the MAs to find entry signals, for example, the Moving Average Crossover Strategy.

Many of our automatic strategies use moving averages to identify the trend mechanically, and they do a great job.

 

How to use the Moving Averages to identify the trend direction

The first basic rule is:

If Price is under the MA, then the Trend is Down

If Price is above the Ma, then the Trend is Up

This formula is not very accurate, many times the price is under the moving average, but the trend is still strong and up:

Price close under moving average

Generally, the price is too erratic, and you have to average it.

The best choice to identify the trend is to use two MA. You can use 20 and 50 periods of moving averages.

Until the Fast MA is over the Slow MA, the trend is up. As you can see, this time, the indicator read the trend accurately.

fast and slow moving average with price

 

We could use a single moving average without the price crossover. Obviously, in this case, we have to use a very long period because in the short period the noise is too high. You also have to use this only in the daily and weekly charts.

Remember that the trend can exist only in high time-frame. We can use a 200 period MA in a weekly chart to analyze commodities.

If the value of the moving average rises respect of the precedent two candles, the trend is up and vice-versa.

 

etf uso - 200 periods moving average

 

If you change the color of the MA based on the trend, you have the Moving Average Slope Indicator.

 

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You can learn more about this indicator, reading these resources:

Wikipedia

 

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My name is Luca. I grew up in Italy. I have a degree in law and I’m an independent trader since 2007. 

I’m a systematic trader and sometimes, I trade using options strategies with US ETFs and Stocks.

I have built hundreds of automated trading systems and indicators for TradeStation, MultiCharts and MetaTrader.

I started this blog in 2017 to share what I learned in the financial market.

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