Critical use of moving averages in stock trading business

Indicators are always considered an essential tool to find the best possible trade signals in the market. No matter which trading method you use, indicators can play a vital role in filtering out the lousy trade signals. You might be thinking that the professional price action and chart pattern traders rarely rely on the indicators. If you dig deep, you will be surprised to know, majority of the Japanese stock traders prefer to filter their trade signals with simple indicators. Though the indicators will eliminate false trade signals, you should still be careful about your risk management policy unless you trade with low-risk exposure.

There are many indicators you can use as a currency trader. To keep things simple, it would be wise to rely on the popular indicator like moving average. Today, we will highlight the critical use of the moving average in the stock trading profession. After reading this article, you should feel much more confident with your actions as you will know the proper way to use the simple moving average.

How to Draw Trendlines and See Price Patterns for Stock Analysis
How to Draw Trendlines and See Price Patterns for Stock Analysis

Identifying the trend

The trend identification process is a very critical job for rookie traders. People who have extensive experience often fail to find the direction of the trend while analyzing the major stocks—failing to identify the core trend of the market increase the risk factors to a great extent. To solve this problem, you may use the simple moving average with period 100. The slope of the moving average will give you the exact direction of the trend.

If the simple moving average slope is pointing north, you should consider the trend as bullish. On the contrary, when the slope is pointing south, you should consider the trend as bearish. You should be able to determine the direction of the trend with a high level of precision based on the slope of the moving average.

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Finding the support and resistance

To execute high-quality trades, you need to find more info about US stocks. Once you start to analyze the significant stocks in the US market, you will realize the importance of support and resistance level. In most cases, the high-quality trade signals are formed at the major support and resistance zone. If you fail to identify these levels correctly, there is no way by which you are going to make a decent profit in the market.

When the price is trading above the 100 SMA, the moving average will be a strong support level. If the price is trading below the 100 SMA, you should consider the moving average as a dynamic resistance. Based on the price position and the moving average, you can also calculate the waiting period for the trade execution process.

Scalping the stock market

You might be thinking that scalping the stock market is an impossible task, but it is very much possible. To scalp the stock market in the lower time frame, you need to know the dynamic support and resistance level. For that, you can use the 10 or 20 periods moving average. Some traders often get confused about using the simple moving average or the exponential moving average. The answer greatly depends on the traders.

As long as you select the correct period for the moving average, you should not have much trouble in finding the best possible trade signals. You may also use the demo trading account to learn the proper use of the moving average. Once you become good at scalping the market in the demo account, you may start trading with real money. Though you will have strong confidence that you can win most of the trades, you should not be taking more than 2% risk in any trade. If you keep your risk exposure low, it will be easy to survive in the trading industry.

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