After reading some other article on our website, you know well that there are two kind of approaches to trading: One of that is called technical analysis and the other one is called fundamental analysis. These two approaches have different nature, both of them seem to be effective in certain circumstances, they are also excellent mixed together.
In this article we'll take care of which of the two methods is the best or which one is most suitable, we present one of the best indicators used in technical analysis to follow price's movement:
- Moving Average Indicator
- Stochastic, MACD and RSI Indicator (read more here)
The first indicator is by far the most widely used, I'm talking about a simple Moving Average. The simple moving average is an average of the prices updated based on the periods in question. The moving average provides always reliable signals, but of course even this indicator brings false signals that should be avoided by combining the moving average to other types of indicators or by using a good money management that is also the basis of the success of any investment.
The moving average is set according to the time frame of the chart, you can have the best signals on the chart of three months with moving average at 25 periods, but even on the smaller time frame, the moving average offers a lot of operative cues. The strategy to use is the following:
Buying when the price overcomes its moving average from bottom up and sell when the price overcomes from top to bottom.
MOVING AVERAGES: THE SLOW AND FAST AVERAGE
There are different methods or, if we want, trading systems that use moving averages, one of them uses two moving averages, one Fast and one Slow. Moving averages have different periods and their meeting determinates certain signals. For example, if we consider a moving average of 25 periods and one of 100 periods, their meeting will determinate signals that won't be wrong. That's the rule of the meeting of moving averages:
Buying when the fast moving average crosses from below upwards the slower moving average and sell when the fast moving average crosses from above downwards the slower moving average.
BEAM MOVING AVERAGES:
This technique is recent enough and is based on the studies of Daryl Guppy, an australian trader who made his own fortune using the system I'm going to explain you. His trading system is based on using multiple moving averages or beams moving averages, that are created in reference to different temporal horizons.
His own indicator has the name of Multiple Moving Averages and it could be built in a very simple and clear way. Let's see which processes we have to follow to build our beams moving average.
The first beam moving averages is made of short period moving average:
- MA 3 periods
- MA 5 periods
- MA 8 periods
- MA 10 periods
- MA 12 periods
- MA 15 periods
The second beam moving average is mad of long period MA:
- MA 30 periods
- MA 35 periods
- MA 40 periods
- MA 45 periods
- MA 50 periods
- MA 60 periods
Now that we have built our beam moving averages, it can be easily proved trading system reliability. When the beams are combined and the short ones cross from the top down those long-term then is a sell signal, otherwise we have a buy signal.
Even this system is not exempt to false signals, but fortunately, thanks to beams moving averages we have truer signals than false ones,this means that throught this system we have positive probabilities provided there is a correct and careful management of capital investment.
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