High Probability trading opportunities using Moving Average A moving average is simply the average value of data over a specified time period, and it’s used to figure out whether the price of a stock or a commodity is trending up or down. Although simple to construct, moving averages are dynamic tools, because you can choose which data points and time periods to use to build them.
For instance, you can choose to use the open, high, low, close or midpoint of a trading range and then study that moving average over a time period, ranging from tick data to monthly price data or longer.
The most common types of moving averages are simple, exponential, weighted, smooth, centered, adaptive, and triangular. Of these, the three most often used by traders and analysts are the simple moving average, exponential moving average and weighted moving average, so I will refer to them often throughout this course.
The Dual Moving Average Crossover System
When designing a trading system using moving averages, most people will begin with a dual moving average crossover approach, as shown in Figure 1-2. The 5-period simple moving average is shown as a thin blue line.
The 10-period simple moving average is the thick black line.
In analysis and technical studies, you’ll often see a chart marked like this, and you will also see some exciting price moves as a result. Look at how the two lines cross over one another at the top of the chart, indicated by the red arrows to the downside. These red arrows indicate that the 5-period simple moving average crossed below the 10-period simple moving average.