The use of moving averages has become much more predominant with the advance of computer software. Moving averages can now be utilized up to the very minute of a trading chart. The automatic calculations for MA’s have greatly simplified their applications. Their use, along with Candlestick signals, makes understanding the stock market a much easier process. As with all other technical indicators, MA’s have a relevance when correlated to price movement. How the moving averages are utilized can make a big difference between moderate returns and highly profitable returns. When applying Candlestick signals with moving averages, understanding where the stock market indexes are likely to go becomes a higher probability evaluation.
There are many trading techniques using moving averages to provide entry and exit decisions. The most common use is when the relevant moving averages cross. The feasibility of using MA crossings apparently has some relevance or it would not be known as one of their useful aspects. However, the benefits of using moving averages become greatly diminished if that is the only application that is utilized. The accuracy of the crossing analysis is moderately successful. But there are many technical evaluations that are moderately successful.
Using Candlestick signals, along with the moving averages in a much different capacity, creates a trading program that produces highly profitable trades. The trades are also provided with a much greater frequency. The point of investing is to find processes for using technical indicators that provide a very high ratio of successful trades. Using the important moving averages as support and resistance areas, in conjunction with Candlestick analysis, advances the probabilities of participating in a correct trade. Fortunately, the use of the moving averages is very simple. Once applied to Candlestick charts, it makes the analysis of where a trend may support or resist a very simple visual process.
The 50-day moving average and the 200-day moving average are the important moving averages. There seems to be a great tendency for prices to support or resist at those averages. The 20-day moving average and the 80-day moving average are also important but would be considered secondary moving averages. Are there other moving averages that work effectively? Probably, but the moving averages mentioned above seem to have a statistical relevance for the past few years and will most likely continue to be relevant for the next few years.
Technical indicators provide important information. An indicator gains importance because of the reoccurring significance of major investment considerations happening at those points. This explanation is put forth so that each investor can become convinced in their own minds that moving averages, especially the ones being recommended in this chapter, have some relevance. Through the following chart evaluations and one’s own chart studying, the relevance of these signals should become apparent. This does not limit an investor from constantly being aware that other moving averages may start gaining importance in the eyes of other technical investors. The point of using these moving averages, along with Candlestick signals, is that historically many investors are watching to see what price movements do at these levels. The advantage of the Candlestick signals is that the signals tell you exactly what investors are doing at those levels.
Moving Averages as Support
When witnessing a downtrend, how do we tell when a bottom is getting near? As described in other chapters of my book, it could be when panic selling is witnessed coming into a price trend as the stochastics are getting toward the oversold area. That is a helpful alert but does not give us a roadmap to where that panic selling might end. Being able to utilize the 50-day moving average and the 200-day moving average as important support areas, those levels can at least be used as a target. Being able to evaluate the potential target that a trend may want to go to now makes the analysis of what is going on in the Candlestick formations that much easier to interpret. For example, if a sustained downtrend is now showing larger candles, the evidence that the panic bottom may be nearing and the price is approaching one of the major moving averages provides extra preparation for seeing what might occur at that moving average level. Panic selling, along with stochastics approaching the oversold area or being in the oversold area, and a major moving average approaching a level where a Candlestick buy signal has a probability of occurring, becomes a trade set up that an investor wants to start preparing for.
Do all charts work well with moving averages? Definitely not! However a large majority appear to. The purpose of Candlestick analysis is to provide an advantage for the investor to see what is happening at important technical levels. The Candlestick signals provide that clarity. If a chart is not providing patterns that make it easy to see what a price movement is going to do, then move on to another chart. There are many from which to choose, especially with the availability of easy-to-use computer scanning programs.
In putting all of the probabilities in favor of the investor, using every technical method can be enhanced when Candlestick signals are applied. How do you discover whether the major moving averages are a positive correlation with anticipating price moves? Easy! Investigate what has happened at those moving averages previously in the price trend. This can be done very quickly. All it takes is a quick visual analysis of what has happened in the past.
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