The Moving Average Indicator Guide
Contents
INTRODUCTION ........................................................................................................................................................3
HOW TO USE MOVING AVERAGE TO TRADE WITH THE TREND................................................................ 4
HOW TO USE MOVING AVERAGE TO IDENTIFY VALUE ON YOUR CHART.............................................. 9
HOW TO USE MOVING AVERAGE TO SET YOUR STOP LOSS .................................................................... 10
HOW TO USE MOVING AVERAGE INDICATOR TO BETTER TIME YOUR ENTRIES ................................ 13
HOW TO USE MOVING AVERAGE INDICATOR TO RIDE MASSIVE TRENDS ........................................... 15
HOW TO USE MOVING AVERAGE TO IDENTIFY THE BEST MARKETS TO TRADE................................ 17
A MOVING AVERAGE TRADING STRATEGY THAT LETS YOU CAPTURES BIG TRENDS ..................... 19
CONCLUSION .......................................................................................................................................................... 22
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The Moving Average Indicator Guide
Introduction
A subscriber recently asked me…
“Rayner, what’s the one indicator you can’t do without?”
Without a doubt, I replied, “Moving Average” (MA).
To be honest, I wasn’t a moving average fan in my early years of trading. I had
thoughts like…
“Indicators are useless because it’s lagging.”
“Indicators are for newbies.”
8 years later… I can tell you, I’m wrong.
MA is one of the most versatile trading indicators I’ve come across, and it can be used
in different ways you never thought possible.
Warning:
This isn’t a basic guide where you’ll learn the difference between simple, exponential,
or weighted MA (you can google them yourself).
These are advanced trading techniques that I’m using to trade the markets (and
some of them you’ve probably not seen before).
Are you ready?
Let’s go.
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The Moving Average Indicator Guide
How to use moving average to trade with the trend
I’m sure you’ll agree with me when I say that a downtrend consists of lower highs and
lows, right?
But… sometimes you get a higher high in a downtrend, so does it mean the trend is
over?
An example:
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The Moving Average Indicator Guide
Rome was not built in a day, and no real movement of
importance ends in one day or in one week. It takes
time for it to run its logical course. – Jesse Livermore
Here’s the thing…
Just because you get lower high (and lower low) in an uptrend, doesn’t mean the
trend is over.
It could be a complex pullback, before the resumption of the trend.
Here’s an example:
So, you’re probably thinking:
“How can I better define a trend objectively?”
Well, you could use the MA indicator to help you.
Here’s how to do it…
If the price is above the 200 EMA and 200 EMA is pointing higher, then the market is
in a long-term uptrend (of your given timeframe).
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The Moving Average Indicator Guide
And… if the price is above the 20 EMA and 20 EMA is pointing higher, then the market
is in a short-term uptrend (of your given timeframe).
Does it make sense?
Next…
You can gauge the strength of a trend by looking at the steepness of the MA.
The steeper the MA, the stronger the trend. And the flatter the MA, the weaker the
trend.
Here’s what I mean:
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The Moving Average Indicator Guide
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The Moving Average Indicator Guide
If you want to learn more, go watch this training video below:
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The Moving Average Indicator Guide
How to use moving average to identify value on your
chart
You’ve probably heard the saying “buy low and sell high”.
But the question is… how do you define what’s low and high?
This is where the MA indicator can help. Now, you’re wondering:
“Which MA should I use?” Here’s the thing…
There’s no best MA out there. Rather, you need to find something that’s aligned
with your trading approach.
If you’re trying to trade long-term trends (on your given timeframe), then the 200 EMA
would suit you.
If you’re trying to trade short-term trends (on your given timeframe), then the 10 EMA
would suit you.
Personally, I use the “space” between 20 & 50 EMA to define the area of value.
Here’s an example:
Pro tip:
MA works best in trending markets. Avoid using them
in range markets.
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The Moving Average Indicator Guide
How to use moving average to set your stop loss
Another term you need to understand
is dynamic Support & Resistance (SR).
These are areas of value on your chart
that’s identified using MA (what you’ve
learned earlier). And this can be a
powerful technique to set your stop
loss.
Let me explain:
When the market is trending, price
tends to bounce off at dynamic SR
(which is an area of value). You can
think of it as a “barrier” that prevents
the price from going through it.
Thus, if you were to set your stop loss just beyond the dynamic SR, wouldn’t it make
sense? Your trade will be protected by the “barrier” which reduce the likelihood of
your stops being triggered.
Here are a few examples:
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The Moving Average Indicator Guide
This is great stuff, right?
Alternatively, you can use this same technique and apply it to horizontal SR.
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The Moving Average Indicator Guide
Go watch this training video below to learn more:
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The Moving Average Indicator Guide
How to use moving average indicator to better time
your entries
Now:
What I’m about to share with you will greatly improve your trading entries.
You’ve learned that in a trending market, MA can act as dynamic Support & Resistance
(SR), which is an area of value to trade from.
And, if you haven’t realized…
The market is like a “rubber-band”. It will snap back if it’s stretched too far away from
the dynamic SR.
Now you’re probably wondering:
“How does this help with my trading entries?”
Well, think about this.
If the market “overextended”, then chances are, it will pullback towards the MA.
Thus, if you’re looking to enter your trades, you’ll probably get stopped out as the
market retraces against you.
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The Moving Average Indicator Guide
So…
If you want to better time your entries, look to enter your trades at an area of value
(like dynamic SR), and not when it’s far from the MA.
Makes sense, right?
Exercise:
Look at your past trades and notice how many of your losers are derived from trading
far away from the MA.
You’d be surprised at your findings.
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The Moving Average Indicator Guide
How to use moving average indicator to ride massive
trends
Let me tell you a secret.
The only way for you to ride a trend is to have no profit targets. Why?
Think about this… if you have a profit target, what you’re doing is putting a limit on your
profits.
And, how are you going to ride a trend if you limit your profits?
Now… I’m not saying having a profit target is wrong because swing traders do fine with
a fixed profit target. But if you want to ride a trend, then having a profit target is
contradicting.
Now you’re probably thinking:
“Okay, Rayner. I understand I cannot have a profit target if I want to ride a trend. So,
how do I ride the trend then?”
Simple. By trailing your stop loss. And the MA indicator allows you to do just that.
Also… You’re probably aware that in a trending market, MA can act as dynamic SR.
And once in a while, it can be respected by the markets for a long period of time (and
I mean really long).
Here are a few examples:
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The Moving Average Indicator Guide
Pro Tip:
The parameter of your MA will dictate the type of
trends you’ll capture.
A short term MA (like 5 EMA) will let you ride short
term trends. Whereas a long term MA (like 200 EMA)
will let you ride long term trends.
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The Moving Average Indicator Guide
How to use moving average to identify the best
markets to trade
Imagine…
You’re going to compete in a drag race, with a top prize of $100,000.
You’ve got two choices of cars. Bugatti Veyron or Toyota Vios.
Which will you pick?
You’re obviously going to select the Bugatti Veyron, right?
It has more horsepower, it’s faster, and with a better braking system.
Now you’re probably wondering:
“What does it have to do with trading?”
Well, it’s the same.
If you want to long, you’d want to long the strongest market. And if you want to go
short, you’d want to short the weakest market.
This allows you to pick the best market and have a higher probability of the trade
working out.
So, how do you pick the best market?
By using a concept called, relative strength.
There are various methods to determine relative strength. But one of the easiest ways
is to use MA.
Here’s my 3 step process…
Step 1: Pick the markets which are within the same sector.
If you’re looking at indices, then compare markets like S&P, Nasdaq, Dow etc.
If you’re looking at USD, then compare currency pairs like AUD/USD, NZD/USD,
USD/CAD, USD/JPY, EUR/USD etc.
Step 2: Plot the 20 & 50 EMA on your charts.
Step 3: Compare the steepness of the MA. The steeper it is, the stronger/weaker the
market
In this example, let’s compare the relative strength between USD/CAD and USD/JPY:
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The Moving Average Indicator Guide
It’s clear you want to be shorting USD/CAD instead of USD/JPY (because it’s a
relatively weaker market).
This is powerful stuff, right?
Let’s move on…
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The Moving Average Indicator Guide
A moving average trading strategy that lets you
captures big trends
This is not a MA crossover strategy.
Instead…
You’re going to use the MA indicator to identify areas of value on your chart.
Then you’ll get an entry into an existing trend and ride it for all it’s worth.
Sounds good?
Here are 7 questions you need to ask yourself:
1. Which timeframe are you trading
2. How much are you risking on each trade
3. Which markets are you trading
4. What are the conditions of your trading strategy
5. Where will you enter
6. Where will you exit if you’re wrong
7. Where will you exit if you’re right
Timeframe
You must choose a time frame that suits your personality and schedule.
If you’re someone who holds a day job, trading the 4 hour and daily charts would be
suitable.
Risk management
You must risk a fraction of your equity on each trade to survive the inherent draw
downs. Keep your risk to no more than 1% of your trading account.
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The Moving Average Indicator Guide
Markets universe
You should be able to trade about 60 markets from these 5 sectors.
1.
2.
3.
4.
5.
Agriculture commodities
Currencies
Equities
Rates
Non-Agriculture Commodities
Here’s the exact moving average trading strategy you can use…
If 200 EMA is pointing higher and the price is above it, then it’s an uptrend (trading
conditions).
If it’s an uptrend, then wait for “two test” at the dynamic support (using 20 & 50-period
MA).
If price test dynamic support twice, then go long on the third test (your entry).
If long, then place a stop loss of 2 ATR from your entry (your exit if you’re wrong).
If the price goes in your favor, then take profits when candle close beyond 50 EMA (your
exit if you’re right).
Vice versa for downtrend
Here are a few examples:
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The Moving Average Indicator Guide
Some important considerations to ask yourself:
1.
2.
3.
4.
Do you wait for price “confirmation” before entry?
What markets are you trading?
Which timeframes are you trading?
How much will you risk on each trade?
There’s no hard and fast rules for this trading strategy.
Instead, you’ll tweak the MA trading strategy according to your own personality and
time commitment.
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The Moving Average Indicator Guide
Conclusion
The Moving Average indicator helps you:
◉
◉
◉
◉
◉
◉
Identify the path of least resistance
Identify areas of value on your chart
Set your stop loss
Better time your entries
Ride massive trends
Pick the best markets to trade
I hope you’ve enjoyed this guide as much as I loved writing it for you. I can’t thank you
enough for your continued support for Tradingwithrayner and everything I do.
I appreciate each and every one of you for taking time out of your day or evening to
read this, and if you have an extra second, I would love to hear what you think about
it.
Lastly, if you haven’t already, you can follow me on Twitter (@Rayner_teo), subscribe
to me on Youtube, and join in on the conversations going on right now on my
Facebook Group.
Thanks again, and I wish you nothing less than success!
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