First: Moving Average as a SIGNAL
1. Single Moving Average
The idea is very simple, you wait for the price (candle stick) cross from below to above of the moving average or cross from above to below the moving average. Here is some example
2. Two Moving Averages
This strategy used two different moving average. The faster moving average acted as the trigger. Trader usually used a combination of 10 and 20 moving average (10 moving average acted as the trigger), or 20 and 50 moving average (20 moving average acted as the trigger). The signal appear when the faster moving average cross the slower moving average. It can be from above to below or from below to above the slower moving average. I'll give you an example:
When you use moving average as a signal, you must wait for the cross, price cross the moving average (single moving average) or moving average (faster) cross another moving average (slower).
I don't recommended you to use this strategy without other indicator. In my experience, this strategy often produce a fake signal. So you must used other indicator to filter the signal that produce by this method.
Second: Moving Average as a MARKET PSYCHOLOGY
I love using moving average this way. In this method you wanna know what other trader think and feel about the market. Is the market going to up, down or side away. The idea is to find out where the price (candle stick) is?
If the price is below the moving average, so we assume that the market under pressure to a lower price and if the price is above the moving average we assume that the market pushing the price higher. How to use it? This idea can be a filter for your strategy. If I have a signal to buy, but the price is still below the Moving Average, i will not execute the signal. Remember, our signal must tell us the same idea with the position of the price. If not, DO NOT EXECUTE the signal.
The problem appear when we use a different moving average. 20 Moving Average and 50 Moving Average will give us a different perspective about our signal. To solve this problem, i used three different moving average, 20 Moving Average for the short term, 50 Moving Average for the medium term and the 200 moving average for the long term. The probability of your signal to become a success trade increase if the price is above or below these three moving average. When the price is above these three moving average, just look for buy signal and ignore all sell signal. Or you can use an aggressive strategy, execute your signal if the price at least above or below two moving average. To use this strategy you must look for the third moving average, because the third moving average will be the next psychology level.
In other hand, we can use moving average as the psychology level. The moving average line act as the support and resistance level. When the price very closed (remember very closed) or touched the moving average, look for the price action. Is the price cross the line with a strong bull or bear candle stick, is the price pause around the moving average, can you spot a engulfing pattern, big belt or a doji. You must pay attention when the price is very closed to the moving average line because a good signal always appear around the moving average.
Hopefully this can help you. ENJOY YOUR TRADE.
