Why Moving Averages Are Important When Trading

Do you use moving averages while trading?  Through my 20+ years of trading I have simplified my access to information before considering a technical trade.  When I started trading as a newbie I had 4 computer monitors and two televisions blaring overwhelming information at me. I had no idea what I was doing, and the overload of information was confusing me on which way the market was headed. There was simply too much information coming at me like water through a fire hose.

I slowly began to settle into trading the markets and learning what technical vs. fundamental trading was all about.  It was then that I started stripping my computer monitors and televisions away.  I needed to get rid of all the noise and information overload.

I finally settled into trading on a cell phone with Japanese candlesticks and a 200 moving average. That’s all!  Yes, I went through all the lagging indicators, trying my success with each of them. RSI, ADX, Bollinger Bands, Stochastics, Keltner, Volume, MACD, Volatility and so many more.  I personally found that most of these were 30%-40% successful which is not a good trading plan for success.

I love trading on my cell phone. I’m not locked down to a desk. I can day trade, swing trade or position trade from anywhere in the world on a simple internet connection (and a broker that offers mobile trading).

I do have a special way of technically trading using support and resistance.  And I only have ONE lagging indicator that I believe holds credibility in my type of trading.  That’s the 200 moving average.

I consistently teach my students that the 200 moving average is a very simple historic marker.  Most of the time, the market (any time frame) is above or below that moving average.  And the 200 moving average is typically heading up or down. Very rarely does it hold a horizontal pattern.  

Now here’s the important education for me that I want so share with you. It’s so simple that a 5th grader can get it.  The 200 moving average is a long term AVERAGE of the market you are looking at or trading.  If a high price drops all the way down to the 200 moving average, most people might call it a crash. But it’s not. It’s only a correction to AVERAGE.  

When I see a market heading up, up, up like the SPX did after the Covid crash of 2020, I saw the 200 Moving Average way down below the price action.  I can easily see the market correcting down to that 200 moving average some day. “CRASH, CRASH” they will say.  But it’s only a correction back to the average price of this market.  Why is this important?

One of our trading rules with my students is to, “Never buy at the top. Never buy the mountain. Never buy the last high.”  We are wholesale buyers in every and all markets.  Therefore we welcome a drop down to AVERAGE or even below average.  Most are running in fear, but I have learned that this is when the big players, the giants, predators and sharks love to enter the market.  

If I could impart anything to you from my trading experience, that would be to put an alarm on your 200 moving average. When price hits that alarm, take a look to see if that moving average is headed up or down (not sideways).  That’s when I  look for a good opportunity to enter that market.  I don’t care if it’s a 1 minute, 10 minute, daily or monthly chart.  There are a few variables that I look for, but generally, I’m looking for a good average price to enter.

I really want to encourage you to strip away all of the noise. You might need to shut down 2 – 5 of your monitors and a couple of televisions.  Limit the flow of data that’s coming into your brain. Relax. Breathe easy. Get a feel for your market. Look at price action and ask yourself if this is a good wholesale place to enter your market.  Wholesale prices limit risk. Retail top level prices expand risk exponentially.  Limit risk. Expand opportunity. This will require focus, patience and precision with only the true information that you need in front of you.