Moving Averages Indicator
As soon as you start looking into the best way to trade you will come across references to the moving averages. In fact, the original Moving Averages Convergence Divergence tool, affectionately known as MACD, was established as long ago as the 1970’s! The tool is designed to assist a trader in choosing the right trading direction, the expiry time and even locating the in the first place. Moving average lines generally work by tracking the average price of an asset to show you which direction it is moving in, how strongly it is moving in that direction and whether it is likely to reach its limits soon; this is usually calculated through the aid of average boundaries. The closer the price of an asset gets to the line the more likely it is to change direction.
This specific tool actually uses two moving averages. Each moving average relates to a different timeframe and, when merged on a chart, you will be easily able to identify the gaps between the two moving averages. The closer the lines are together the weaker the price movement is and the more likely it is that it will change direction imminently. The opposite is true for lines which are far apart.
Advantages VS Disadvantages
The tool uses two moving averages, both of which need to be based on historical data. This means that you are always operating behind the real price in the market. As such, you can see a change in direction arriving only to find it has already happened when you place the trade. It is certainly not the right tool if you are trading on the trend.
However, if you are aware of this weakness this can be a valuable part of your arsenal in placing successful trades. This tool requires you to take a slower approach to the market and the trades; this will ensure each opportunity is examined properly before you take action.
Trading by using two moving average lines will also enable you to spot when the market appears to be about to change direction but is not. This tool will show you the market is weak; allowing you the option to continue trading whilst other tools have already given up; you can continue to make money on the turn.
The best time to trade using this indicator is when the two lines cross, this means they are about to change direction and you can place a trade for the opposite to the current trading direction. This should also be the point that a histogram through the middle of your chart will be nearly invisible. With a little practice you will be able to pick out these movements even on an imperfect chart. You can then trade with confidence. It can even tell you when to close a trade early as the market is about to move against you. If you have any concerns regarding implementing this indicator then simply practice a few times first; without using any funds. You will quickly get the hang of it!