Moving averages are a useful tool to any investor who wishes to gain a competitive edge in trading. The ease of use in moving averages is what makes them the greatest of technical indicators for any old investor. A moving average measures a set of days as a line, tracking the underlying market that it covers. It can be computed a myriad of ways, but for simplicity's sake we will use the most common example. Commonly, moving averages are used as 50 day averages as well as 200 day moving averages. To calculate the 50 day moving average, you would simply average up the previous 50 days. This calculation is renewed each and every day to keep track of the 50 day moving average line, which of course, tracks the market.

Support and Resistance

The most common use of these technical indicators would be to define support and resistance levels. For example, if the market being followed is trading at 100, and the 50 day moving average is at 95, while the 200 day moving average is at 85, there is a clear uptrend. Imagine those levels now. If the market were to touch below 95 or 85, it can be seen as a testing of major support levels. Once the market has cleared the 85 level, this breaching of the 200 day moving average is a bearish signal and breakdown of resistance.

Now, imagine the opposite where the market is trading at 100, and the 50 day moving average is above at 110. This indicates a bearish trend and any move in the market that attempts to near the 50 day or 200 day moving averages,will be seen as tests of resistance.

Defining Cycles

Using the 4 week and 8 week cycles as an example, we would plug into our moving average technical indicator 20 day and 40 day variables. So long as the moving average indicator line is pointing up, we have a positive up cycle, and vice-versa. If the 20 day moving average line is pointing up, and is crossed over the 40 day moving average, there is a great deal of momentum. We should then expect a reversal in the weekly cycles, once this momentum turns the other way to breach the 40 day moving average line.

Finding pivot points

Using smaller intervals for the moving average lines gives us greater insight into short term trading markets. For example, the 3 day and 5 day moving average lines will essentially mimic the market. The intervals will smooth out any outlying trading activity. With this, you can pinpoint any pivot point where the market will most likely experience congestion and a loss of apparent momentum.

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