A moving average is a line on a chart that represents the average of prices over a specific timeframe, it changes as the price changes in the timeframe it represents.
Moving averages are technical tools that traders use to identify trends on charts.
A simple moving average is just the average of prices in the timeframe, an exponential moving average gives more weight to recent prices and changes faster when reacting to new prices.
Moving averages can smooth out price action for trading trends.
Moving average crossover systems can further smooth out volatility for holding positions during a trend.
Moving averages are for trading trends and are not useful during sideways markets.
Here is a quote from billionaire trader Paul Tudor Jones: “My metric for everything I look at is the 200-day moving average of closing prices. I’ve seen too many things go to zero, stocks and commodities. The whole trick in investing is: “How do I keep from losing everything?” If you use the 200-day moving average rule, then you get out. You play defense, and you get out.”
Legendary trader Ed Seykota’s early trend following systems were based on Richard Donchian’s 4 Week Rule and 5 and 20 day moving averages.
Moving averages create the potential for big wins and small losses by capturing trends and exiting with a small loss early during a trend reversal.
Moving averages are quantified signals unlike trend lines that can be discretionary and based on opinions.
Moving averages can be backtested for their viability as profitable signals.
Moving averages can be used as entry signals, stop losses, profit targets, trailing stops, and discretionary trading tools.
