The moving averages are of immense importance for understanding the context of the chart. Ironically, many beginning traders do use MAs but in a wrong and oversimplified way. For instance, they look for MA crossover entries which in the long-term usually fail. The MA’s provide a wealth of information about the price chart but in a different context and certainly not for crossover entries.
So what are the benefits of the MAs?
With MA’s as a tool, traders can understand both wave and chart patterns of the market without actually counting or knowing the Elliott Wave Theory or chart pattern names. Why?
Because the waves that price makes respond in similar and repetitive ways to the moving averages. Here is how it works:
By understanding how a) price moves in relationship to MAs, b) how MAs move in relationship to other MAs, and c) the angle of the MAs, traders can capitalize on the wave patterns and wave movements without knowing or identifying the waves.
This means analysing MAs is a short-cut for understanding the market structure, wave patterns and chart patterns.
You might be wondering then how does price move versus the MAs. Basically, price is always in a constant flux of moving away and back to the MA’s (similar to the tide of the sea), which is valid for all financial markets and time frames. The position of price and the MA’s is the key.
By analysing price and the MAs, traders can understand the chart dynamics in various ways and help determine:
- Whether the market is trending or ranging
- The direction of the trend
- When price is moving impulsively
- When price is moving correctively
- When the MAs are expected to act as a support or resistance
- When price is likely to continue with the trend
- When price could make a reversal