Moving Average Trading Mistakes to Avoid
If you are trading moving averages, you may be committing any of these 5 major moving average trading mistakes, and yes, they all need to be avoided!
5 Moving Average Trading Mistakes to Avoid
Let’s go over the 5 most crucial moving average trading mistakes that you as a beginner need to know about, at least if you plan on being a profitable trader.
Trading on Every Pullback
One great way to trade using moving averages is by trading on pullbacks. There is no denying the fact that this can be a very profitable trading method. However, when it comes to bigtime moving average trading mistakes that people often make, it’s to be a little too loose and to trade on every possible pullback.
This will lead to losses if you keep it up. Moving averages represent support and resistance, but not always, and it’s not 100% reliable. Markets can change direction in an instant. You need to wait to see confirmations to place a trade, and you can do this by utilizing MACD or support and resistance.
Not Knowing the Difference Between SMA and EMA
When it comes to crucial moving average trading mistakes, another one that all too many newbies make is to start trading without knowing the difference between SMA and EMA. Yes, these are both moving averages, simple and exponential moving averages, and no, they are absolutely not the same things.
A simple moving average is slow and it leads to late confirmations. It’s nothing more than a simple moving average over a period of time. Exponential moving averages are far more reactive to current events and provide far faster signal confirmations to enter trades with.
Now, this does not mean that you cannot use simple moving averages in some cases. Yes, they do have their uses. However, with all of that said, exponential moving averages tend to be faster and more reliable. At any rate, you need to do a bit of research and find out what the differences between these two types of moving averages are.
Trading When the Moving Average Line is Horizontal
Yet another one of the really big moving average trading mistakes that all too many people make is to place trades when the moving average line is horizontal on the chart. This is a huge mistake. When the moving average line is horizontal, it means that there is no or little market volatility. If there is no trend and no market movement, it is nearly impossible to make money trading.
When you trade with moving averages, you always want that line to be diagonal or crooked, or in other words, it needs to be trending either up or down. However, if the line is horizontal, there is no real trend, and the chances of losing money are very big. Remember folks, the trend is your friend. If there is either upward or downward momentum, it is a good thing. However, markets that are not trending at all can easily move in either direction, and this can be really hard to predict.
Sticking to a Single Moving Average
The next of the big moving average trading mistakes that all too many people make is to stick to a single moving average. Using only a single moving average doesn’t provide you with nearly enough information to accurately enter and exit trades, and single moving averages are already quite susceptible to market noise.
Therefore, you never want to trade with just a single moving average. It is recommended that you use at least 2 moving averages to place your trades, if not 3 of them. The best way to go about this is to use a very long moving average, and a shorter one. It’s best if you use a 200 exponential moving average and a 20 exponential moving average.
This is the best way to go for getting the best and most accurate signal confirmations. The reason for this is because the 20 exponential moving average will give you a good idea of what the short term trend is like, and the 200 exponential moving average will give you a good idea of what the long term trend is like.
Ignoring Support & Resistance Points
When it comes to moving average trading mistakes, perhaps one of the biggest ones that you could commit is to completely ignore support and resistance points. Folks, support tells you that it’s time to make a buy, and resistance tells you that it is time to place a sell trade.
Both support and resistance are crucial to entering profitable trades. You always want to place trades near support and resistance points. If the charts are not showing any good support and resistance points, wait to place trades until there are.
Moving Average Trading Mistakes – Doing it the Right Way
Alright, so now that we have covered all of the most important moving average trading mistakes that you need to avoid, let’s sum it all up and explain exactly how to enter a trade using moving averages.
- Place your 20 EMA and 200 EMA lines on your chart, so you can see both of them, and do so on a 4 hour chart.
- Place your support and resistance lines.
- In our example (in the video), you can see the price hitting the support line right at the 200 EMA.
- Move to a 5 minute chart. In this timeframe, in our example, you can see various confirmations where the candles touch the 20 EMA and bounce back up.
- So, in essence, place you EMA lines, place your support and resistance, and then look for the entry confirmations.
Moving Average Trading Mistakes – Final Thoughts
Folks, if you manage to follow the tips that we have provided here today, and you manage to avoid the 5 major moving average trading mistakes that we talked about, your chances of placing profitable trades will increase exponentially. If you are still unfamiliar with moving averages, it is recommended that you first do a bit more research on this front.