The moving averages are a key higher time frame reference. We realize that they are not a part of the traditional Auction Market Theory process but they are heavily watched amongst the big players and are a great gauge of the current market conditions. We prefer to use the Exponential Moving Averages (EMA) over the Simple Moving Averages (SMA) because they are more dynamic (engaged) and provide a smoother perspective. Either moving average type will work and it comes down to preference but like we said, we prefer the EMAs because of the dynamic engagement of price. EMAs respond faster to price changes than SMAs. Additionally, we prefer to use the EMAs on a daily chart to see a good medium of all the time frames. You can of course use smaller or larger chart periods and as always, come down to personal preference.
We utilize the following EMAs and break them down into short term trends and long term trends:
When the market is trending, it will be supported by the 5, 10 and on larger pullbacks, 20 EMAs. When price touches these averages, we’ll often see either buying or selling come into the market with the respective direction of the trend.
In the following example, you can see how price is affected by each average given the market’s context. The red boxes we’ve drawn on here are pointing out what we would call short term trends or moves that find support or resistance at the 5, 10 and 20 EMAs. These averages will see reaction from the shorter to medium term time frame market participants.
Longer term trends will be supported at the larger time frame references as we mentioned, the 50, 100 and 200 EMAs. These levels are where you will see higher time frame participants’ reactions.
So the idea in using these averages is just to build on another layer of context and reference in the overall top down technical analsis process. Or more importantly, see what the higher time frame traders are referencing in the current market’s structure. You of course can marry these levels in with your other references to identify key confluence areas for potential trade locations.
The basics of the use of moving averages we imagine would be known with a majority of people on here but for those that don’t know how they work and their general uses of them or rules if you will, here’s a quick primer.