Moving averages are simply mathematical equations all the average price over the last “X” candlesticks. In other words, if you have a 20 day moving average, it plots on your chart the average price over the last 20 candlesticks on a daily chart. Moving averages are thought to be indicative of where the market is most comfortable, and is used as a smoothing indicator. You can use them to determine which direction the trend is going; as short-term volatility can sometimes make that a bit difficult. There are several different theories on which moving averages are best to use, but there are some standards that people tend to follow. The 50, 100, and 200 day moving averages are very common for longer-term traders, as they represent short-term, medium-term, and long-term momentum in general. Quite often, these moving averages can act as support or resistance due to the fact that so many people pay attention to them. On the chart in the video, I am following Coca-Cola and I have a 200 day moving average plodded on the chart in orange. This moving average is below current pricing, and that suggests that we are still very much in an uptrend. We are above the 200 day moving average, and the moving average is tilting towards the upside meaning that it is starting to pick up momentum to higher levels. As long as we stay above that level, most long-term traders will simply only buy this particular asset as opposed to look for selling opportunities. It doesn’t mean that this market can’t fall, it just shows that the overall proclivity of this market is to continue going higher. Most traders will look at a chart like this and then start to look for shorter-term buying opportunities. With fact, you know that your following the longer-term uptrend.

When looking at the MACD, or the Moving Average Convergence Divergence indicator, you are looking at one of the most popular indicators used by technical analysts in all fields. The first thing you need to understand is exactly what this indicator is. It has a signal line, which ironically most traders completely ignore. However, you also have a histogram, and that’s where people tend to focus on. The indicator is simply the measure of the space between 2 moving averages. In this video, I have the 4-hour chart of the New Zealand dollar versus the Swiss franc. I have the 12 and the 26 moving average plotted on the indicator, even though the moving averages don’t show up on the chart. When I do put them on the chart though, you can see that they are spaced out in relation to the MACD. In other words, as the momentum is going to the upside with the shorter-term moving average rising above the longer-term moving average, the histogram rises. The wider the space between the 2 moving averages, the larger the histogram goes in whichever direction the momentum is flowing. At the same time, you have to keep in mind that the zero line will be crossed every time that the moving averages across. And again, you have the 9 moving average used as the dashed red line on the indicator, but typically most people don’t use that as it tends to clutter up the signals.

Mean reversion, which is one of the most common ways to analyze a market, can be done through several different indicators. Simply put, you are trying to find a market that is a bit overbought or oversold, and treating it with the expectation that we will see markets return feel that would be considered normal. After all, markets try to find some type of normalcy, a lot of times represented in the form of a moving average. And as such, a lot of the mean reversion techniques involve moving averages such as with the Bollinger Bands. We also have mean reversion using overbought and oversold indicators with such things as Stochastic Oscillators, MACD, and other indicators that are quite often presented on the bottom of your chart. Essentially, they all work the same, they simply signal when markets may have been a little over exuberant, and as a result could very well turn things back around and try to find will be a little bit more in the way of normalcy. This doesn’t mean that markets always return to the mean, just that they typically will. After all, quite often the market will do so – but there are some ‘black swan events’ that can happen. This is rare, but it does happen. In other words, it is like any other type of trading, it’s not 100%, but it plays the averages like most traders tend to. Having said that, it makes sense that more often than not, you will ‘win’, and over the longer-term, those ‘wins’ should outnumber all of your loses.