Wishing good luck to everyone interested in price action trading with a limited time horizon of weeks or days, one of them is swing trading. The most commonly used among all the best most popular ways of using swing trading is moving average because it can make the trader powerful enough to be able to predict the trend and make the right moves. Here we will give *instruction on the usage of moving averages in swing trading and the 2-step analysis method that will be best for you when it comes to making decisions about trading or not trading.
What are Moving Averages?
The moving average is a quantitative number that smooths out the previous price in an attempt to give some sort of trend. Two of the more well-known ones are the simple moving average (SMA) and exponential moving average (EMA). Moving averages are used in an attempt to establish the direction of the trend as well as, perhaps, entry and exit on swing trades.
SMA: A simple moving average is found by taking the average of closing prices for a duration (e.g., 50-day or 200-day).
EMA: Exponential moving average assigns proportionally more weight to more recent prices and responds faster to changing market conditions.
How Moving Averages Assist Swing Trading
In swing trading, the bid is short to medium price action taking. Moving averages are an indicator of being bullish also by foresight of whether there is any trend or not along with giving levels of support or resistance. There are some extremely rare situations where moving averages prove helpful in swing trading which are discussed below:
1. Identifying Trend: You set the direction of the trend in the market using moving averages in the required direction. Price trending above a moving average is usually an uptrend and prices trading below the moving average are a downtrend.
2. Entry and Exit Signals: The second fairly well-established method of trading swing trading involves the use of moving average crossovers. The short-moving average (20-day EMA, for example) will cross over the long-moving average (50-day EMA, for example), and that is a buy or entry signal. That should be the opposite with a short-moving average crossing over a long one the other way to sell or to exit.
3. Resistance and Support: Moving averages are moving resistance or support. Price will fall to a rising moving average in an uptrend, and it is support. It might rebound off a falling moving average in a downtrend, and it is resistance.
The 2-Step Analysis Process for Swing Trading with Moving Averages
To apply moving averages correctly in swing trading, you need a process. The 2-step assessment process is an acceptable process. The process helps to provide you with a quick glimpse of the trend and possible trading opportunities.
Step 1: Define the Trend
Market direction general identification is step 1 of the 2-step assessment. It’s formed by putting a highlight on the price relative to the moving average.
If the price is just above a longer moving average (i.e., 200-day SMA), then the market is bullish.
If the price falls below the average, then the market is bearish.
If the price is between the average, then the trend would be a range or sideways trend.
After you identify the trend, then you can trade the trend, and that is the whole concept of swing trading.
Step 2: Find Crossover Signals
Step 2 of the 2-step analysis is to find moving average crossovers. Crossovers are a good entry and exit point. These are to be followed:
Buy Signal: A short moving average crossing over a long moving average is a buy signal to go long.
Sell Signal: Short moving average crossing below long moving average, close or sell short.
These crossovers and others such as volume or momentum will be some kind of verification for the trade setup.
Conclusion
Most of the time, moving averages are utilized in swing trading because they allow one to understand the trends, support and resistance levels, and selling and buying points. Using the 2-step evaluation process, your decision will be made easier and your winning rates in the markets will be enhanced.
Keep in mind that moving averages will be an approximation. Do not always look for accuracy from them, but rather use them in combination with other technical indicators for increased depth of your swing trading strategy
Anderson