Simple moving averages are perhaps one of the oldest and most widely used swing trading indicators. Many traders use simple moving averages for trend identification. The most common for swing trading are the 150 and 200 simple moving average on the daily chart to identify the long term trend. There are other kinds of moving averages, such as EMA, but they are rarely used by banks and large players.
Moving averages are typically used for two purposes:
The 150 and 200 day simple moving average are typically used to identify the major trend. When price is above the 150/200SMA, the trend is up. When price is below, the trend is down.
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It may be hard to believe, but that is how many professional traders identify the major trend in many markets. When price is above the simple moving average, they are looking only to buy or go long. When price is below, they are only ever looking to sell or go short.
In addition to trend identification, simple moving averages are used by many traders as possible areas of support and resistance. Swing traders use price bouncing off of the moving averages as part of their entry criteria.
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The above chart shows price clearly bouncing off of the 150 SMA and continuing on with the trend. Similar entry conditions would be used when the market was in a down trend and traders were looking to sell or go short.
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The above image shows how the 150 SMA can be used to show potential areas that may offer resistance. Price rallied up to the 150 SMA, found resistance (confirmed with a Japanese candlestick formation) , and then continued on down with the trend.
Of all the moving averages, professional traders favour the simple moving average over them all. Keep it simple. Use the 150 day SMA or 200 day SMA on your charts primarily to identify the major trend.
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