Why can others profit using moving averages while you always incur losses? Are moving averages really useful?
In the trading market, moving averages are a very common technical indicator. Many people successfully profit using moving averages, while others are often trapped by them. Why is this? As a trend-following indicator, moving averages indeed have unique advantages, but they also have limitations that cannot be ignored. Today we will explore why moving averages can sometimes help us profit and sometimes lead to losses.
Disadvantages of moving averages
Missed the best buying point after the golden cross
A golden cross refers to the short-term moving average breaking above the long-term moving average, which is seen as a buying signal by many. However, many times, the appearance of a golden cross often means that the price has already risen for a period of time, and the price has deviated from the initial buying point. Entering the market at this time can easily lead to a price pullback, resulting in losses.Missed selling opportunities after the death cross
A death cross refers to the short-term moving average falling below the long-term moving average, which is usually seen as a selling signal. However, the price often continues to fall for a period of time after the death cross appears until the trend completely reverses. Choosing to sell at this time may mean missing the best selling opportunity, resulting in reduced profits.
Advantages of moving averages
Clearly identify the dominant trends in the market
Moving averages can help us clearly understand whether the market's dominant trend is bullish or bearish. When the short-term moving average is above the long-term moving average, it indicates that the market is dominated by bulls; conversely, it indicates that bears are dominant. Moving averages can provide an intuitive direction of the trend, helping investors make clearer decisions.Intuitive representation of market sentiment
By observing the shapes of moving averages, we can assess changes in market sentiment. For example, when the moving averages show an upward divergence, it usually indicates that market sentiment is relatively optimistic; when the moving averages converge downward, it may indicate a tendency toward pessimism in market sentiment. With this information, investors can adjust their strategies more timely.Clear signs of trend beginnings and endings
Moving averages can help us identify the starting and ending points of trends. Although technical indicators can easily fail in volatile market conditions, moving averages can still play a role in major trends. When prices break through or pull back to the vicinity of the moving average, it usually signifies the continuation or reversal of the trend.
Dual moving average strategy
The dual moving average strategy, as the name suggests, combines two moving averages: one short-term and one long-term. The buying and selling timing is determined based on the crossover of the short-term and long-term moving averages. The specific strategy is as follows:
Golden cross at the start of a trend
After the market has undergone a period of consolidation, when the price breaks through the long-term moving average to form a golden cross, it is often a signal that the trend is starting. Especially the longer the market has been in a consolidation range, the higher the accuracy of the golden cross usually is. In this case, investors can enter the market based on the signal of the golden cross.
Continuation of the trend
In a strong trend, the short-term and long-term moving averages maintain a large gap, and prices often continue to break upward. In this case, the pullback of the moving averages is often brief, and the market remains strongly bullish. If a crossover occurs between the short-term and long-term moving averages at this time, it may still signal the continuation of the trend.
Trend reversal
When the market enters a consolidation phase, moving averages often show alternating golden and death crosses, leading many investors to misjudge. In this case, the crossover signals of the short-term and long-term moving averages may just reflect the repeated oscillations of the market. To avoid being 'washed out,' we should enhance our ability to identify consolidation phases and avoid frequently entering and exiting based on misleading signals.
End of the trend
At the end of a trend, the price may touch the long-term moving average twice, after which the magnitude of the price reversal often increases, leading to the end of the trend. At this point, the appearance of a death cross does not necessarily mean that the market has completely ended, but if the market fails to break through the long-term moving average twice in succession, investors should be cautious about the end of the trend.
How to improve the efficiency of using moving averages?
Combining with other indicators
Relying solely on moving averages to judge buying and selling timing is risky, especially in volatile markets. It can be considered to combine with other technical indicators, such as MACD, RSI, etc., to confirm the reliability and sustainability of the trend, reducing the chances of misjudgment.Adapting to different market environments
In different market environments, the performance of moving averages will also differ. In strong trend markets, moving averages are relatively reliable; however, in volatile markets, the signals from moving averages may have many false breakouts. Therefore, investors need to adjust their strategies according to the market environment.Strictly control risks
Regardless of the strategy used, risk control is always the most important aspect. By reasonably setting stop-loss and take-profit levels, controlling the risk of each trade can prevent significant losses from misleading signals.
Summary
As a trend-following tool, moving averages do help us identify the dominant trends in the market and provide reference signals at the start of trends. However, the lagging nature of moving averages and the possibility of false signals also trap many investors when using moving averages. To profit in the stock and futures markets relying on moving averages, in addition to effectively utilizing moving averages, it is also necessary to combine them with other technical indicators and flexibly adjust strategies based on the market environment.
Investing is a marathon; only by maintaining enough patience and caution can one truly progress steadily in the market.
