How Should You Use Moving Averages?

Moving averages are one of the most commonly used tools in technical analysis. They are also one of the most commonly misused.

The problem is not that a moving average can never have value. The problem is that many traders use moving averages as shortcuts. They want the line on the chart to tell them what to do. They want it to act as support or resistance. They want a crossover to be a buy or sell signal. That is where the trouble begins.

A moving average is simply an average of past price. It is not magic. It is not a trading system. It is not a substitute for reading the actual price pattern.

Think about what is really happening in the stock market. Billions of dollars change hands every day. Institutions, funds, traders, investors, algorithms, and market makers are all participating. Do you really think that all of that money is revolving around a squiggly line that you placed on your chart?

That is why moving averages should not be used as automatic support or resistance. They should not be used as trade signals by themselves. Moving average crossovers, by themselves, mean absolutely nothing in terms of consistently making money.

There is also another problem. Which moving average are you using? What time frame are you looking at? Are you using a simple moving average, an exponential moving average, or a weighted moving average? Are you using the 20, the 40, the 50, the 200, or something else?

Once you understand that, the idea that a moving average is a precise trading tool starts to fall apart.

I do keep a few moving averages on my charts. Personally, I use the 20, 40, and 200 simple moving averages. But they are there for one purpose only: to help analyze trend.

That is the proper use.

Moving averages can help give a consistent visual reference for trend. They can help you see the relationship between current price and the recent price pattern. They can also help create consistency from chart to chart, but only if you use them the same way all the time.

The key is consistency. Use consistent chart sizing. Use consistent moving averages. Look at your charts the same way over and over again. That allows you to train your eye to recognize similar formations and understand the actual price pattern more clearly.

It does not really matter whether you use the exact moving averages I use. But if you have no better reason, using common moving averages does have one advantage: it allows you to see what many other traders are seeing. That can sometimes create a slight self-fulfilling prophecy effect.

But that is very different from saying the moving average itself is the reason for the trade.

The bottom line is simple: moving averages can have a place on your chart, but they should not replace price action. They are not trade signals. They are not automatic support or resistance. They are not a shortcut.

Use them, if you use them at all, as a consistent tool to help analyze trend.

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