A slope’s relativity
By learning how to monitor these averages, traders can gain a broader understanding of their own strategies. The shorter the moving average is over time, the less the slope will change. For example, if you have a 20-day MA over a period of three months, the slope may changes dozens of times during those three months. But if it were a 50 or 100-day MA, the slope would change a lot less or not at all. The changes in the slope can be represented in data charts, which in turn can be analyzed to track price movements on the market. The first of two ways that the slope is relevant in this analysis, is that a long-term average has greater support and resistance, while a short-term average has less support and resistance. The second relative factor of the slope is that the rise and fall of the slope affect the support and resistance, depending on the price’s averages. Therefore, a long-term average that is rising will offer more support than a falling average would, when the price is trading above the average level. The inverse is also true, that a falling long-term average offers greater resistance than rising short-term average when the price is trading below that level.
For every change in the market, you need to understand how this affects your next trading move. When a price rises above the long- and short-term averages, it creates a bullish movement common in uptrends and bull markets. As a result, long-side trading strategies, bigger positions and longer holding periods are favored. Alternatively, when the price drops below average, a bullish divergence will occur which allows for dip buying opportunities and value plays. When a price is trading above average, an opposing slope will indicate conflict.
A bearish convergence can be seen when a price drops below already falling averages. Larger positions and longer holding periods are then recommended for short sale strategies. This signals a downtrend or bear market. If the price should rise above falling averages, it will result in a bearish divergence, in which profit taking and short selling are advisable. When the price trades below these averages and has opposite slopes, it could signal a conflict.
An overview of MA
This is only a short summary of the relationship between prices, moving averages and slopes. The pricing structures are often volatile and will interweave. However, this should not be seen as negative, because it allows for both short and long trading opportunities. However, if the moving averages converge and the price moves between the gap, it could potentially cost you many opportunities. When a moving average turns horizontally in a sideways market projection, the value of trade and investment decision making may decrease. The key is to go for a long side when the price is above long- and short-term moving averages that are rising. If the price moves below falling short- and long-term moving averages, you should get on the short side. In the event that slopes don’t align, or when the trading price is below rising averages or above falling averages, it is best to play it safe and avoid the risk.