Beware of these mistakes, which most traders or investors make when using the
moving average indicator.

As every trader uses it at some point in their life, the use of moving
average.

The moving average indicator is useful because of its ease of use in making a
chart understandable, as it tends to give us a good idea of the trend related
to price and time.

First of all, let us understand
what a moving average is. As there are thousands of definitions available on the internet, let us try
to understand the basic and simple definitions.

Moving average is something that you can easily understand by the name itself,
as it describes the average of something, and that something is nothing but
the average of price and time-related data.

How many types of moving averages are there?

Basically, there are many moving averages, but we are going to talk about the
mistakes made in moving averages. So normally, only two types of moving
averages are used in day-to-day trading and investing.

And those two types are:

1. SMA (simple moving average) and
2. EMA (exponential moving average).

SMA is basically used for trading done for longer periods of time, like
for 1 month, for a year, and so on. It is usually said to be a slow-moving
average.

EMA is a fast-moving average that is used when trading is done for a
shorter period of time, like intraday trading.

The 5 things that should be stopped while using the moving average
are

5. Using the wrong moving average

Yes, it is true that most traders make this mistake; they often go for using
such a moving average, which is really worthless to use on such a chart that
doesn’t respond to it accurately with deserving data and time.

Let’s take an example of the trade that you are going to take on
the chart. The time period is set on the daily chart, and you set the moving
average indicator, but wait, you set the moving average indicator to the
exponential moving average (EMA) indicator.

And this is where the traders do make mistakes, as they are using the
indicator on the daily chart, but they set the moving average indicator in
exponential form.

So the consequence of it is that the indicator gives us a fast report based on
the most recent figure, refusing the past most figures, so it is definitely a
wrong step to use the moving average like this because you will get yourself
confused and take up the wrong trade based on the analysis of the moving
average you set.

Simple moving average

Let’s take another example of traders who use simple moving
averages on intraday charts, like, for example, 5 minutes, 10 minutes, 15
minutes, 30 minutes, and 1 hour.

and they get themselves somewhere around the confusing data stream of the
moving average. As they are doing intraday work, they need the recent figures
based on the moving average, but by their mistake, they end up taking the
wrong deceison.

Exponential moving average

At the end, what we learn is that we should use a moving average that is
closely compatible with the chart timing on which we are analysing.

4. Use of only one moving average in the chart

As you have understood from the title itself, using only one moving average is
not going to work for you.

Yes, we all have done this while analysing the chart; we end up studying the
chart reading with only one moving average.

Sometimes it happens that it may have worked for some trades, and that is
where the traders get trapped by not using the second moving average.

Because the trade in which we got some profit using the single moving average
makes us so confident about the single moving average that we do not even
think of analysing the chart with the second moving average.

What is wrong with using a single moving average?

Using a single moving average can falsify our analysis. Let us understand this
with an example.

Let us assume that we are analysing a reliance chart of day timing, and we
have inserted a simple moving average of a 50-day SMA. After that, we saw an
upside trend in the indicator, and we took some trades on it on our indicator
indication basis.

50 days moving average

But what we see next is that the trend gets opposed instantly after a few
candles and makes a heavy downfall. And this is very confusing for the newbie
who has just started their trading career.

And the reason that was found after so much research is that it hits the
200-day SMA that works as the resistance of the stock and makes it a bearish
trend after that.

200 days moving average in green color

So I wish you had understood the importance of two moving averages.

Let us discuss some points on the importance of using the two moving averages
simultaneously on a single chart.

• It clarifies the whole indication of the moving average, especially the
  smaller days and the bigger days of moving average data.
• It stops us from making wrong trades by providing us with the correct
  picture of the present trend based on past figures.

It is basically recommended that we use two moving averages, and
they are:

1. The first should be for smaller times, like 50 days or 20 days SMA.
2. The second should be for higher times, like 200 days of SMA.

3. Trends can oppose

One of the pros of using the moving average is that its signal of trend
is not stable; it can vary depending on the situation, and you have to
determine the situation and patiently follow the moving average.

 

This is why most traders lose all their confidence in the moving average
as the trend fluctuates from time to time.

 

Nobody can judge itself by using and seeing the moving average to
determine when its trend will reverse and to what extent it can be
continued.

It is only the future that will tell us; our only task is to rely on the
moving average line.

 

If the moving average line is above the candlestick, then it is
determined to be a selling opportunity, and if it is below the
candlestick, then it is determined to be a buying opportunity.

 

Whereas about stoploss and target, it depends wholly on the moving
average line reaction to the market.

How are trends opposed to moving averages? What are the reasons?

Trend-opposing simply means that the stock is changing its ongoing
direction; for example, if it is going upside, then it will reverse to its
opposite, like going downside. And if going in the downside direction,
reverse to the upside direction.

 

Moving average trend changing

That is what creates the main confusion and problem in the usage of the
moving average. So what are the reasons behind it? Below are some of the reasons.

• News-based reason
• confusion occurred by not using the right moving average.
• due to long-term resistance or support level

2. Not every support or resistance is actual.

One of the important things that is looked at in the moving average
is support and resistance.

 

But in reality, there is a lot of confusion in finding the correct
support and resistance in moving average every time.

 

Because what we see as support or resistance reverses with a sudden
change in time and data.

 

Let us understand what support and resistance are in a moving
average.

 

Support in the moving average happens when the stock is
hitting the moving average line continuously from the upside.

 

Resistance in a moving average happens when the stock is
hitting the line of a moving average from the downside
continuously.

 

Basically, support and resistance are looked at because support and
resistance levels are meant to be the best place where a trade can be
taken because the level of stoploss is less near the support and
resistance zone and targets are meant to be high from that
position.

 

support and resistance in moving average

Sometimes, the support and resistance levels in a moving average are
easily perceptible, and the thing that makes them difficult is that
sometimes the easily perceptible support and resistance are found to
be wrong.

What are the things that can possibly happen when support and
resistance are found to be wrong in the moving average?

Let us know this with some points.

• A trade can go wrong if taken on the basis of wrongly made
  support and resistance in a moving average.
• The important thing is that we lose confidence in moving average
  usage.
• We waste our crucial time in that stock.
• Our chance of getting the best other stock is wasted.

1. Not every breakout and breakdown is true.

The first thing that is seen in the moving average line is
breakout and breakdown; actually, it is the main thing of the
moving average line on which the traders do take trades, and its
importance is because of this thing.

 

Breakout, as the word suggests, simply means that the
stock price is breaking the moving average line in an upside
direction. Basically, when it happens, it means that a bullish
trend is going to happen.

 

false breakout in moving average

A breakdown happens when the stock price is breaking the
line from upside to downside, and when it happens, it is assumed
that a bearish trend is going to start.

 

false breakdown in moving average

This is so important to some traders that they look for only this
thing to happen. And their trades are on this basis only and
nothing else.

 

Some of the things that are kept in mind to assume a correct
breakout and breakdown are volume.

 

Many traders say that a true breakout and breakdown in the moving
average happen when it breaks with good volume.

 

So volume plays a vital role in getting the correct breakout and
breakdown in the stock.

What are the consequences of trading in false breakouts and
breakdowns in the moving average?

Basically, if something is wrong, then its result too will be
havoc. It’s not that interesting, but it teaches us a lot. Let’s
talk about the two main consequences of it.

• In general, we are going to lose our money.
• The uncertainty of the moving averages leads to the
  falsification of our analysis, which is the big thing as we
  lose confidence in our trading ability.

Conclusion

FAQs on mistakes made while using moving averages