Moving averages allow traders to quickly spot intermediate to long term trends with
the quick look of a price chart. In the above daily chart of Applied Materials we
see that AMAT was traded in an upward trend that began in September 2010 and continue
up to March 2011 where price topped out. A simple buy trade would have been trigged
when prices closed above the moving average in the second week of September.
In the Above daily chart of the AMAT we can see how the double averaging of the
red TMA line is more responsive than the yellow simple moving average line. If you
look closer at the two moving averages you will see that the Triangular Moving Line
has more waves then the SMA which is a result of the TMA reacting to more of the
underlying swings in AMAT prices than the simple moving average line.
The double moving average crossover is one of the most popular trading strategies
uses by traders today. In the above chart of daily chart of Intel we can see how
effective the Triangular Moving Averages is opposed to using the simple moving average
for the double crossover strategy. Using a red 12-period TMA as the signal line
and a yellow 24-period TMA to be a proxy for the intermediate trend we can see this
strategy produced 4 signals from the end of May 2011 to September 2011.
In the above chart of INTC we have added the 12-period and 24-period simple moving
averages for comparison. The 12-period SMA is the green dotted line for the trigger
line and the 24-period SMA is the light blue dotted line for the intermediate trend
line. Looking closely we see that the simple moving averages produced trigger signals
one to two days after the triangular moving average lines. In volatile markets this
can have significant impact on the overall profitability as entries could be a point
or more later than if one were to use the TMA’s for this strategy.
Moving averages can be used to find support levels and very useful spot buying entry
points on price retracements in intermediate trends. In the daily chart price of
SPY we see that the market was in a nice uptrend which started in November 2010
and continued up until February. Looking at the chart we can the moving average
line hugging the price action and providing support in this move higher.
One common tenets of technical analysis is that support once broken becomes resistance.
Looking closely we see how the SPY briefly traded below the moving average as market
participants debated which way the market was heading next. A bullish signal was
not triggered until prices closed above the moving average for a Christmas rally
in late 2010.
Moving averages are great tools for traders looking to ride market up and down swings.
To be successful it’s imperative that you understand all of the positives and negative
characteristics the type of moving average you are utilizing. Regardless of which
type you choose, all moving averages are lagging indicators that display historical
price movement and will not predict future price action. Ultimate success using
moving averages is determined by catching long term trends and managing your capital
efficiently. By trading with TMAs versus trading with SMA’s your moving average
line will be smoother which can guide you in volatile markets and reduce moving
average lags making it easier to spot trends. Like all technical indicators, traders
can increase their probability of success by employing multiple indicators to confirm
trading signals. Regardless of what trading strategy you choose, you must select
a strategy that fits your personality and ability to handle risk. As we have seen
the TMA produce smoother trend lines that are more responsive to changes in price
than the SMA. The Triangular Moving Average is a versatile tool that can be used
to improve your trading.