Factors to Consider When Using Moving Average : NobleTrading Blog

Monday, November 17, 2008

Factors to Consider When Using Moving Average

Moving average is one of the most widely used indicators for trading all types of financial instruments, especially forex currencies. It is simple and is easy to interpret and can be used in any style of trading. But there are many factors which are to be considered when you using moving average for trading instruments.

Market data used: most often closing price of a day is used for moving average calculation, but you can also use daily highs or lows, opening prices or medians to calculate moving averages.
Time periods used: 30 day and 50 day moving averages help position traders and investors to finding enter and exit points, and also stop losses. But day traders and similar active traders should use intraday (1 hour, 30 minutes, etc) moving averages.
Market trends: Most trading strategies based on moving averages work well when market is on a move (either upward or downward). They are less effective in sidewise moving markets. Also in a sidewise market trading systems often generate too much wrong signals.
Your Trading Objective: Are you an aggressive trader having high risk tolerance? Or you are a conservative trader looking for preserve your capital? You should find buy and sell signals and stop-loss points based on your objective.
High volatility: Traders using short-term moving averages to enter a trade before a large move often get wrong signals when prices are rapidly going up and down.
Lagging indicator: moving average respond to current and past trends and can not be used widely to predict trends. Many times a trader following moving average enter a trade when the opportunity diminishes.