When not to use a Moving Average

Moving averages are the most commonly used of all the technical indicators.

 

They have the uncanny ability to get you in and out of trades without trying to find tops and bottoms.

 

Moving Averages can identify long term trend direction.

 

They can be used to identify stop loss levels too.

 

However, with all their benefits, is there a time not to use moving averages?

 

In my opinion, yes.

 

This is not being detrimental to the moving average, but is actually a way to enhance the moving average signals overall.

 

Support and Resistance levels.

 

Support and resistance levels should form the basis of all your trading entry points.

 

Knowing if the price is approaching key S&R levels can save you many lost points.

 

If you have opened a trade unknowingly near these vital levels to see the price rebound in the opposite direction, you know what I mean.

 

When the price of whatever it is you are considering trading is approaching solid support or resistance levels then you need to tread carefully.

 

And it is at these levels that moving averages can give you false signals.

 

When Not to use a Moving Average

 

Have a look at this chart of the DOW. You can see that I am using a 10/20 EMA on the 4H candles.

 

You can see that I have drawn in what is a solid resistance level.

 

Now, you can also see that the there were crossover on the 16/05/19 and the 21/05/19 both signalling a long trade.

when not to use a moving average

 

However, if you had drawn in your resistance levels accurately then you’d never have really considered taking this trade on knowing that there was such a large possibility of the price rebounding back of the level.

 

If you wanted to use the crossover as a valid signal, then you’d have waited first to see if the price broke through the resistance level and then opened the trade.

 

You can see that from drawing in support and resistance levels, if a moving average crossover is signalled as the price approaches these levels then it is a clear time when not to use a moving average to enter a trade.

 

You will notice this occurrence often when trading, and not entering a crossover trade when the price is approaching support and resistance levels will save you many a losing trade.

 

Range Trading Moving Averages

 

One other time to ignore moving average signals can be when the price is trading within a range.

 

Again, you can easily find if a price is trading within a range by drawing support and resistance levels.

 

Look at this chart of the USDCAD you can see that the trend has been seems to be stuck in a range although moving slightly up.

no moving average

 

You can also see that there have been numerous buy and sell signals created by the moving average crossovers.

 

Some were most certainly winning trades, but many more losses. You could have used a swing trading approach for far better results than the moving average can offer in this instance.

 

Once again though, if you hadn’t drawn in S&R levels then you could be having a trading nightmare trying to find a winning trade using a moving average.

Drawing in the S&R levels alerts you to not take any action until the price had broken out to either the up or downside.

 

Simple Trading

 

Moving averages combined with support and resistance lines offer one of the simplest but most effective ways to start trading.

 

If you can add into that the times when not to use a moving average, then your points profit over time can be improved along with your trading confidence.

 

To Recap

 

Moving averages are an awesome indicator to get you in and out of trades.

However, they can become even more effective by avoiding the signals created when the price is nearing major support or resistance levels.