If you’ve ever wondered why moving averages are such a popular tool for the technical trader and how traders profit from them, you are in good company! Yesterday, CEO of The Lazy Trader.com, Rob Colville, took to the limelight and participated in an interview with Jenny Hammond (The New Economy) to discuss the how and whys behind this technical tool.
In the interview, which was filmed on location at The New Economy’s headquarters on Compton Street in London, The Lazy Trader discussed how to successfully trade using moving averages in trending markets, when not to use them and how to objectively use them to analyse any market.
The New Economy is both a quarterly magazine and a website which provides in-depth analysis, expert opinion and lucid insights into innovation in technology, energy, and corporate strategies in their wider business context.
(Jenny Hammond, The New Economy and Rob Colville, CEO The Lazy Trader)
Jenny: Moving averages are one of the most popular tools for technical analyst but how is the best way to profit from markets using these indicators trader Rob Colville joins me to discuss.
So Rob moving averages Rob why so popular?
Rob: Moving averages – they are an objective way of gaging the sentiments in the markets. Unlike trend lines or horizontal levels, traders use them because they can get a very clear idea as to whether we are in a trend; upward or downwards. We use moving averages to determine the speed momentum of the market…to give us a reading whether we are in an upward trend or downward trend. Other forms of technical analysis; using trend lines for example -they can be a little bit subjective. If I were to give a chart to 10 different people and ask them to draw trend lines they’ll probably give different readings: their trend lines would be drawn differently. However, with moving averages, you can gage the markets speed and momentum. You can also look for opportunities based on whether you get a bounce off the moving average with the behaviours of dynamical support and resistance.
Jenny: There are lots of different ones out there so how do you decide which one are best one for you and to apply to your charts?
Rob: I’ve always stuck to the 20, the 50, and the 200 moving averages, the 20, 50 and 200 for me represent the short, medium and long term traders in the market and if we can piggy back those moves… then great. You can get different combinations out there; fibonacci based moving averages, etc. You know, you can probably throw a dart at the dart board and just randomly guess a moving average combinations and there are thousands of combinations but those three work best for me and they have done well in terms of their interaction with the market and demonstrating what the market is telling me.
Jenny: And simple verses expediential which is best and what is the pro’s and con’s for both?
Rob: Oh I’d say exponential- there’s this expression you should always be in the present when you’re trading. Of course, use historical data to look for clues however, exponential is weighted more to the present, where as simple has more of a lag on it essentially. So expediential tracks price action better and if we get expediential moving averages behaving as dynamic levels of support resistance then great.
Jenny: There are certain things that traders should really be aware of though and using these tools to not make common mistakes?
Rob: I mean a lot of people use moving averages incorrectly. I look for order, angle and separation with moving averages. Which essentially will reflect an upward trend: if the moving averages are angled upwards, separation between the moving averages and then the right order with the 20 above the 50 the 50 above the 200. Incorrectly using moving averages say for example in a range by market people were moving averages are facing the same to imagine a clock face facing 3 O’clock. People use moving averages in choppy markets, and that’s not the right way of doing it you should use and applying moving averages to trending markets only.
Jenny: So talk me through the basic rules of using these then?
Rob: No matter what your moving average combination is, whether it’s the 20 the 50 or the 200 like what we do, or, something else, I’d look for the order of the moving averages say you’re in an upward trend I’d want the shortest term moving averages to be on top of the medium one and the medium term one to be on top of the longest term one. I’d want space between the moving averages and I’d want separation between the moving averages. Because when you’ve got that it’s a sign that the market has speed and momentum and, like I said, in an upward trend with speed and momentum, it will enable us to buy the pull back. For example, buy a dip and get the outcome of our trade faster rather than if the moving averages are facing towards 3pm and moving side-ways we can’t really get any reading from that to trade off unless you just want confirmation that you’re on a ranging market.
Jenny: And are there any better indicators to use than past prices?
Rob: Price action is always going to be the leading indicator. You can look at reversal divergences whether it’s the stochastic or the RSI which gives us a clue that there is a change in tide in sentiment. but of course those divergences could amount to nothing. I’d say price is the best indicator to what is happening now.
You can view the original interview on the The New Economy website