AI Summary
This video is a beginner-friendly tutorial on using moving averages to identify market trends and improve trade entries. The hosts explain the basics of moving averages, demonstrate how to use crossovers and trend filters, and walk through a pullback strategy with a two-for-one risk-reward setup.
Chapters
Moving averages were first practically applied around 1930 by analysts to smooth out price noise and identify trends more clearly. They are now used across futures, cryptocurrencies, forex, and other markets.
A moving average is the average price of an asset over a number of periods. For example, a 9-period moving average uses the closing prices of the last nine periods, dividing by nine to create a line that smooths the chart and filters out noise.
The two main types are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). The SMA gives equal weight to all candles, while the EMA gives more weight to recent candles. The EMA is more common in day trading because it responds faster to market changes.
If the moving average is pointing upwards and the price is above it, the trend is upward. If the price is below the average and the average is pointing downwards, the trend is bearish. This helps traders avoid going against the trend.
When a 9-period moving average crosses above a 21-period moving average, it is a buy signal. Conversely, when the 9-period crosses below the 21-period, it indicates a potential downside. This crossover shows recent price gaining strength in one direction.
Moving averages work best in markets with a clear trend. In sideways or lateral movements, they produce false signals, which traders should avoid.
The 9-period EMA is considered a fast average, and the 21-period EMA is a slow average. When the fast average is above the slow average and both are pointing upwards, it indicates an upward trend. The reverse indicates a downward trend.
A pullback strategy involves waiting for the price to retrace to the 21-period average. When the price returns to the average and the 9-period is above the 21-period, it signals a potential purchase. Wait for a strong candle to confirm entry.
The strong candle is the entry signal. The stop loss is placed below the recent low. Targets can be set using Fibonacci or a 2:1 risk-reward ratio, e.g., if the stop loss is 200 points, set a target of 400 points.
Avoid using moving average crossovers in sideways markets. Do not use moving averages in isolation; combine with price action or other indicators. Always use risk management and practice on a demo account before trading with real capital.
Moving averages are a foundational tool for identifying market trends and improving trade entries. By understanding how to use them with trend filters and pullback strategies, beginners can make more informed trading decisions.
Mentioned in this Video
Tutorial Checklist
Study Flashcards (10)
What is a moving average?
easy
Click to reveal answer
What is a moving average?
A moving average is the average price of an asset based on a number of periods, used to smooth the chart and filter out noise.
01:37
What are the two main types of moving averages?
easy
Click to reveal answer
What are the two main types of moving averages?
Simple Moving Average (SMA) and Exponential Moving Average (EMA).
02:05
Which moving average is more commonly used in day trading and why?
medium
Click to reveal answer
Which moving average is more commonly used in day trading and why?
The exponential moving average (EMA) is more common because it responds more effectively to rapid changes and trend movements.
02:17
How do you identify an upward trend using a moving average?
easy
Click to reveal answer
How do you identify an upward trend using a moving average?
The average is pointing upwards and the candle is above that average.
02:31
What does a 9-period moving average crossing above a 21-period moving average indicate?
medium
Click to reveal answer
What does a 9-period moving average crossing above a 21-period moving average indicate?
It indicates a buy signal, showing that recent price is gaining strength in one direction.
02:58
In what market condition do moving averages produce false signals?
easy
Click to reveal answer
In what market condition do moving averages produce false signals?
In lateral or sideways movements.
03:29
What is the 'fast average' and 'slow average' in the context of moving averages?
medium
Click to reveal answer
What is the 'fast average' and 'slow average' in the context of moving averages?
The 9-period average is the fast average, and the 21-period average is the slow average.
03:43
What is the pullback strategy described in the video?
hard
Click to reveal answer
What is the pullback strategy described in the video?
Wait for the price to retrace to the 21-period average, then enter on a strong candle with a stop loss below the recent low.
04:25
What is a 2-to-1 risk-reward ratio?
medium
Click to reveal answer
What is a 2-to-1 risk-reward ratio?
If the stop loss is 200 points, the target is set at 400 points, giving a 2:1 reward-to-risk ratio.
05:36
What are the practical tips for using moving averages?
medium
Click to reveal answer
What are the practical tips for using moving averages?
Avoid crossovers in sideways markets, combine with price action, always use risk management, and practice on a demo account.
06:18
💡 Key Takeaways
Definition of Moving Average
Provides a clear, foundational definition that is essential for understanding all subsequent concepts.
01:37SMA vs EMA
Explains the key difference between the two main types of moving averages, which is crucial for selecting the right tool.
02:05Trend Identification
Offers a simple, actionable rule for determining market direction, which is the core promise of the video.
02:31Trend Filters
Shows how to use fast and slow averages as a filter to avoid bad trades, a practical application of the concept.
03:43Pullback Strategy
Provides a complete, executable strategy with entry, stop loss, and target, fulfilling the video's promise of a practical approach.
04:25Full Transcript
[00:02] time to open your manual. I am Lois. And I am Ricardo. Have you ever entered a trade and realized you were going against the trend?
[00:23] beginner trailer. Today we're going to show you a simple and totally dynamic way to identify market direction and improve your entries: the famous moving averages. That's right . And we'll show you how
[00:37] it works in practice. And finally, we'll show you a pullback strategy using moving averages that you can try today. Come with us. So, let's move on
[00:55] historical introduction, okay? Moving averages emerged well before day trading and modern technical analysis. The first practical application was around practical application was around 1930, starting in 1930, by analysts
[01:08] who wanted to smooth out the noise and improve price assessment to identify trends more clearly. Over time, various types of averages have emerged, used in alignments, e.g., futures, cryptocurrencies, forex, and
[01:23] others. These are tools routinely used by traders and analysts worldwide. A moving average is basically the average price of an asset based on a number of periods. For example, a
[01:37] nine-period moving average will use the closing price of the last nine periods, calculate an average (or, if it's a simple average, divide by nine). This creates a line that moves on the graph. It helps to smooth the chart,
[01:51] filter out noise, and show you the overall price trend. There are several types of moving averages used, but basically two are the main ones. The SMM stands for Simple Moving Average, and the
[02:05] exponential moving average . The simple moving average gives equal weight to all candles, while the exponential moving average
[02:17] gives more weight to recently accumulated candles. In day trading, the exponential moving average is more commonly used because it responds more effectively to rapid changes and, obviously, to all the trend movements in the market.
[02:31] One way to understand the trend is to look at the average; the average is pointing upwards, and the candle is above that average. This means the trend is upward. If the candle is below the average and the average is also
[02:44] pointing downwards, it means the trend is bearish. With this, you can already avoid going against the flow. Another very common use is the crossover of moving averages. For example, here in the chart, we have the moving average in orange and
[02:58] the 21-period moving average in pink. Basically, when the 9-period moving average crosses above the 21-period moving average , we have a buy signal. And basically, conversely, obviously, when the 9-period moving average falls
[03:13] below the 21-period moving average, we clearly have a moment there of a possible upside. This crossover shows that the recent price is gaining strength in one direction. But be careful, the moving average works best in markets with a
[03:29] clear trend. In lateral movements, obviously, you're going to have false signals, which is what you should, obviously, avoid. Now let's talk about trend filters. Same thing. The
[03:43] nine-period exponential moving average is orange, and the 21-period moving average is pink. We call the average of nine a fast average, and in this case, the average of 21 is a slow average, right? And when the 9-period moving average is above the 21-period moving average, like in this chart
[03:58] here, and both are pointing upwards, that's clearly an upward trend. The same thing happens when it's reversed, right? When the 9-period moving average is below the 21-period moving average , it indicates a downward trend. This
[04:13] simple filter can save you from many bad deals. So, as we promised at the beginning of the video, we're going to show you a simple pullback strategy on the retracement of the mean. So, let's look again at this same
[04:25] day here, which is very, very clear. The price went up quite sharply. He returned here with an average of nine, but we're aiming for an average of 21. Either way, it could work, OK? What happens on an average of 21? So, it went
[04:38] up, it came back here at the average, at this point here. So, this already raises a red flag about a potential purchase. It indicates that, since the average of nine is above the average of 21, it is therefore indicating an upward trend. So
[04:53] now we're going to wait for a strong candle so we can make the entry. In this case, our strength candle is this candle here. This candle here indicated a very strong trend compared to the other candles.
[05:08] And with that, this force is your input signal. After that, you make an entry right up here. Where would your stop loss be placed? The stop loss would be placed below, on the bottom line here. Oh man, but where am I supposed to go out? What
[05:22] would my target be? There are various types of targets. There are Fibonacci targets, and there are two- to-one targets where you have a return, for example, your stop here would be 190 points, you would place a return of
[05:36] points, you would place a return of 380 points. Okay, so yes, you can do this with an ATR stop, and there are several ways to create both your stop and your target, OK? Yes, in this case , we're going to do a simple two-for-one
[05:48] . So, if my stop loss is, let's say, 200 points, then let's set a target of 400 points. So, when it reaches the 400-point mark, you close the trade with a simple and easy profit, which is
[06:03] extremely easy to read. Now let's talk about some important and practical tips that are very important for you to take into account in your day-to-day operations. First, as we've already discussed, avoid using moving average crossovers when
[06:18] you have a sideways market. Do not use moving averages in isolation; always use price action in conjunction with them, or some other indicator. Always use risk management, in conjunction with other strategies and indicators, okay? Averages are
[06:32] very helpful, but obviously they don't guarantee 100% accuracy, so keep risk management in mind. And obviously , always practice on your simulation account, your demo account, before taking it to real trading with
[06:45] real capital. Now you know how moving averages work and how to use them in day trading. Remember, these strategies we've shared are beginner strategies; there are much more complex strategies
[06:58] related to moving averages. It's really just an introduction to the market. If this content helped you in any way, please like and follow us on our channel and social media – it really helps us out here. Write
[07:11] below which moving average you prefer , the simple moving average or the exponential moving average. So, it's time to wrap up this manual, and until the next wrap up this manual, and until the next video.
