Moving Averages And The Macro Trader
There are about a gazillion different technical indicators that traders can use but one of the simplest is also one of the best. The moving average is simply an average of the last X periods of time. A 50 day average would be an average of the last50 days. They call it moving because every day you take the 51st day off and add today. This creates a moving line that over time lags the market by a relatively consistent amount.
So how is the moving average useful? Well one day in the market can just be a blip but several days of action can really add up to a real move. Essentially you have a great measure of the trend. If you have a 50 or 200 day moving average it is safe to assume that you can gauge the direction of the primary trend by looking at one direction the moving average is in.
There are several other types of moving average aside from the SMA simple moving average. We have exponential moving average which weight the most recent days heavier then the older days. There are weighted moving averages where you can choose what days to weight heavy and which to weigh lighter. There are displaced moving averages where you bump it up a few days. There are even some moving averages that require high level math. There is definitely a moving average that will go along with what you are trying to do and what you want.
This is obviously a great tool for the macro trader? If you want to stay on the right side of the market you must use some tools to tell you what is happening. Bty staying with the trend and trading in the direction of a longer term moving average you will be able to improve your risk to reward ratio and generate higher and more consistent returns over time.
Some of the more popular moving averages are the 50 day, 200 day, and 20 day to help gauge the short, medium, and long term trend. Many people also move these out to a weekly timeframe with a 4 week, 10 week, and 40 week moving average. Depending upon what you are trying to see or gauge you can even use a muli year moving average. There is a moving average for all types of traders and investors and you should learn to use them in your activities.
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