“Back up and look at the big picture.” That’s good advice for futures traders. Moving averages help us sort through sometimes chaotic price variations to see what is really happening in the market. Moving averages allow us to see the forest through the trees. By stripping away price volatility by removing both unusually high and low price variations from consideration, moving averages show us the actual underlying trend.
Futures traders usually calculate and chart several moving averages of various time variations (5-day, 20-day, etc.) for use as indicators. Short-term moving averages are more sensitive to price change, but early signals may proof to be false. Long-term moving averages respond more slowly, but there is the danger of missing the trend by waiting too long. By comparing short, medium and long-term moving averages, futures traders can spot probable trend changes. The challenge is to determine the combination of time variations that will create that optimum balance that results in reliable indicators.
Watch your moving averages for these signals:
- When a faster average crosses above a slower average, buy.
- When a faster average crosses below a slower average, sell.
- When the daily close is below either moving average, offset long positions.
- When the daily closes is above either moving average, offset short positions.
One important caveat about using published moving averages for information or comparison: You cannot assume that the market will behave today the way it did yesterday!
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