BonusTrade comes with 4 indicators, Moving Average (MA) is featured in all of them, for a good reason. You will find the Simple Moving Average (SMA), Exponential Moving Average (EMA), Mesa Adaptive Moving Average (MAMA) and Bollinger Bands, which includes a mid-band that is also a Moving Average.
2 ways to trade with Moving Average indicators
Moving Average is arguably one of the most widely used technical indicators. There are many ways you can use the Moving Average indicators. The most common strategy is trading the crossover in a trending market. Another common strategy is to use the Moving Average to mark the retracement to the support or resistance levels for trade entry.
Support & Resistance quick primer
Support and resistance levels are the most fundamental tenets of technical analysis.
Simply put, up trends tend to come to some barriers where prices tend to stick and don’t seem to want to go further. That’s the Resistance level.
Conversely for down trends, prices tend to bottom out at certain levels and don’t want to go lower. That’s the Support level.
Support and resistance levels are important info for traders. Prices tend to either bounce back or break out at these Support and Resistance levels. They are very useful markers for trade entries and stop loss.
Now, let’s get back to our two methods to trade the Moving Average.
Moving Average crossover
When you trade the MA crossover, you will need two MA lines to cross over each other. Typically in technical analysis, one would use a fast MA and a slow MA. A fast MA is simply a moving average with fewer periods or data points, and a slow MA has more periods or data points.
In the case of the BonusTrade app, the MA indicators come preconfigured so you would use 2 different MA indicators instead of two different periods of the same indicator.
As to which indicator to use, take your pick, find the ones that make the most meaningful crossover lines that correspond to change in trends.
For MA crossover, you need a clearly or strongly trending market or else there could be too many crossovers and false signals.
The trade entry points are exactly at the crossover of the two lines so as soon as a crossover is made, you would enter the trade in the direction of the crossover as shown by the red arrows for Down trades and green arrows for Up trade. The screenshot below shows the SMA (red) and the MAMA (green) crossover:
Note that you should only use this strategy when the market is trending clearly. As you can see, this is a short term trend reversal strategy. The crossover marks the reversal.
Moving Average for Support & Resistance
If the market is trending and you want to trade with the trend, you would enter trades at the pullback or retracement, the first thing you would do is to find an MA that would fit nicely with the current trend patterns, like this:
Note that Support and Resistance levels are not always horizontal. When you apply an SMA line to the chart, you will clearly see that not only are Support and Resistance levels not always horizontal, they don’t always run in a straight line either.
In the chart below, the blue line is the EMA. The yellow spots indicate retracement to the Support for the Up trend. This is where you want to enter your Up trade. The green spots indicate retracement to the Resistance. This is where you would enter a Down trade in a down trend. Although in this particular example, the prevailing trend is up so trading against the trend is not advisable.
This is a trend following strategy.
Which Moving Average indicator should you use?
There is no one single best MA indicator. You will have to try them out to see which works best with what assets and under what conditions.
For the BonusTrade app indicators, the Bollinger Bands mid-band is the same as the SMA so I suggest you use SMA instead of Bollinger Bands with either EMA or MAMA for the crossover. MAMA does not show Support and Resistance levels as clearly and smoothly as EMA or SMA in the app.
Conditions change quickly when you are tick trading. A nice looking strong trend can disappear or reverse with no warning. Be sure to zoom out for the bigger picture and move on when trends dissipate.
The MA crossover strategy is a short term trend reversal strategy. You enter a trade at the crossover in the direction of the MA crossover and slope.
The MA Support and Resistance strategy can be used as a trade entry marker for a clearly trending market when prices retrace to the support (up trend) or resistance (down trend) level.
These strategies work best when the market is trending.
Try out these Moving Average strategies with the BonusTrade tick trading app. It’s free to download and you get $10,000 of virtual money in your demo trading account to practice with as soon as you install the app. No sign up necessary!