Using Moving Averages when Following the Trend

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If you are to trade successfully on the basis of going with the main trend, you must take several factors into account. Which is not to say, however, that to do so is difficult or time consuming. It is not. But one should have a good grasp of a trading plan before he/she begins, and also they should give their trading approach a reasonable time to prove itself before they abandon it in favor of another trading method.

In addittion, if you decide you want to be a trend follower, dont start second-guessing the market and become a forecaster. You will probably only take the worst of each method and end up with losses, frustrated and dreaming about opening a hot dog stand.

Just do nothing, rest assured that the trend-following method will make you money IF the market you are trading begins to trend.

But if you find yourself in the market, where prices are locked in a narrow range, chances are the trend-following method will almost certainly result in losses. For as soon as prices break out of that channel and begin to rise – and you go long following a buy signal – the market will most probably sooner or later reverse itself and burn your butt.

The most important ingredient for success as a trend follower is the nature of the market you are trading when you are trading it. Even good trending markets go into trading ranges. Expect them and you wont be disillusioned when your trend-following strategy stops working for you.

If you are being a big believer in moving averages, just remember that no commodity can ever stage an uptrend without the price raising above a MA and conversely, no commodity can ever form a downtrend without first showing evidence of more selling than buying by the prices falling below a MA.

To refine your trend-following system, you may want to look for a certain relationship between moving averages as well as between one or more averages and the price. All systems based on MA share certain similarities. Among these are the length of time used in computing the average and the degree of penetration required.

I also noticed that too little penetration of the average by the price results in whipsaws and excessive trades, while too much penetration has the effect of cutting down profits on those successful signals you get. Just some my observations. I do not use moving averages myself. So take it for what is worth.

Tom out