Are Moving Averages Slowing Down Your Trading Performance?

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Beginner
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Sam Seiden

02 Feb, 2018

in Technical Analysis

If moving averages are hurting your trading or investing performance and getting you below average results, it’s because that’s exactly what they are designed to do. They are a very popular tool for novice retail traders and investors yet hardly used or thought about by the professional trader/investor. Helping you understand this is the focus of this piece.

Instead of going through many charts to find the perfect picture to use as an example to illustrate my logic, I like to use real trades as examples from our live trading rooms.

Below is a trade I took in the NASDAQ futures. We identified 2 strong supply zones where banks were selling that morning as seen on the chart below. When price rallied and reached the supply zones, I shorted the NASDAQ and profited ($1,000) as price fell. These were 2 strong supply zones on top of each other and there was a clear profit zone below. Notice the only information I used to make decisions was PRICE, nothing else. No tools, news, opinions, indicators and so on… Price is the only thing that shows me the objective picture of real time supply and demand in any and all markets.

Sam Seiden Live Trading Room Trade 25th Nov 2017: NASDAQ Short – NO Moving Average

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Fig 1

Now let’s look at the same trading opportunity again, only this time let’s add one of the most popular trading/investing tools in existence, the Moving Average. Most people use 2 moving averages and when they cross, that is a buy or sell signal according to the rules laid out in almost every trading book ever written. For shorting, when the fast-moving average (blue line) crosses the slow-moving average (red line), that is the sell signal for those who use this tool.

 

Sam Seiden Live Trading Room Trade 25th Nov 2017: NASDAQ Short – WITH Moving Average

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Fig 2

“A” represents price at the supply zone where I shorted. Below and to the right, “B” represents the moving average cross that is the sell signal for those using moving averages. What this clearly shows is the vast difference in the price when using moving averages to select your entry point vs. using price. Meaning, using a moving average to enter this or any trade ensures you will not sell at supply (retail prices) or buy at demand (wholesale prices). You will instead sell much lower, losing profit potential. This, of course, is because moving averages lag price; that’s what they do/are.

Adding anything to your decision-making process that lags price only increases risk and decreases reward. Selling at supply (retail) and buying at demand (wholesale) ensures the lowest risk, highest reward and highest probability trading/investing opportunity.

Now think about how you successfully buy and sell things in any other part of life. You would never use a moving average because on the one side you would pay too much and on the other you would hardly ever make money. Those on the other side of your transaction would love you of course, but that’s not the goal. To think that a decision-making tool that lags price will help you buy low and sell high is very flawed thinking and you can’t win in trading if your losing in your mind. Many of the traders following indicators such as moving averages are really smart people who have the best of intentions, they’ve just been taught incorrectly.

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Its inherently true that using a tool in the wrong manner will lead to poor results. But that doesn't mean you should throw out that tool or give up woodworking using tools.

MA's are the only indicators I use. I don't use crosses for entry signals and I don't trade off reversals. But the locations of MA's to each other, their slope directions and the location of price to MA's - plus the recent histories of these relationships - are very helpful techniques in trend-following.

As for MA's being lagging indicators, that's exactly what I want for what I'm doing.

There are infinite wrong ways to use a tool and we don't need to learn all of them.

Apr 17, 2018

Member (6853 posts)

A terrible example

You should know better Sam. moving averages can Absolutely be used in sideways volatile conditions IF you know how to use them properly. But what Really annoys me is you write this nonsense and choose the worst possible example to try and prove it doesn’t work. So it seems your article was clearly written to lure the uneducated into your room. Moving averages can absolutely be of great benefit if used in the right ways. It’s a shame we get so much misinformation and confusion. In fact their is probably some other ”expert” using the same example to show that price patterns or candlestick patterns do not work when in fact they DO work When used correctly and in the right market conditions. I’ve seen many “experts” try and tell us why Rsi doesn’t work in trending conditions but if you know how to use it correctly it absolutely does work. Yes price action is king ( again if used correctly ) and I’m a fan of KISS but I wish you so called “experts” would stop trying to post misinformation about Technical Analysis just to try and impress and lure in new business.

Apr 17, 2018

Member (1 post)

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