Moving Averages #1

The Moving Average Indicator is the most popular tool used by Traders and Investors who want to quickly and easily determine the Trend of any Financial Market. Long duration Moving Averages (MAs) such as the 50,100,200 Daily Moving Averages (DMAs) and the 30,40,50 Weekly Moving Averages are useful for visualizing the overall primary trend of a market. When the long duration MAs bundle up together after being spread out it tells us that the momentum of the primary trend has observably weakened and it tells us that we should be cautious and open to the possibility that the primary trend could be about to reverse.

As you can see in the above chart, the long duration MAs signalled to us that momentum had weakened when they bundled up together. Following that we saw the MAs roll over in a bearish manner with the fastest (30 period) MA drop below the other MAs. The MAs were then used as resistance, with price dropping hard from this resistance during May > Jul 2008. This signals to us that we should avoid trades and investments on the Long side of the market until the observable evidence has improved. We can consider shorting the market if it has a primary bearish trend like this.

Shorter duration Moving Averages such as the 9 DMA and the 21 DMA are useful for finding counter trend movements and taking advantage of them for Day & Swing trading. Checkout my Moving Averages #2. post for information about how to use MAs in your Day, Swing & Long Term Trading & Investments.