Daily Moving Average, Guiding Your Commodity Trading
The moving average line of a commodity is simply its average price over a given time period.
So for 20 days the line indicates the simple mean of prices for the latest 20 days.
A more complex indicator is called exponential moving average which gives more weight to the recent days over the same time period. So why use them?
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While some traders use a combination of different time periods, using too many will not lead to discovery of some magic formula or secret.
Usually two simple measures(DMA) are used, say 15 and 25 days, and it is how these two lines move relative to each other that helps to indicate a change in trend for commodity price.
How do they work together?
The shorter the length of the DMA the more volatile the movement in the trend line compared to the longer DMA, so a 15 DMA will jump about more than say a 25 DMA.
When the 15 DMA crosses the 25 DMA from below and heads upwards, this indicates a likely upward trend.
The probability of a sustained upward swing will be confirmed as the gap then widens between the 15 DMA and 25 DMA.
Likewise, if the 15 DMA crosses the 25 DMA from above and heads downward, then this indicates a strong possibility that the price action is going to move downward. When does the Simple Moving Average work best?
It works best when the commodity market or the individual commodity being traded is trending and not simply going sideways.
So if the market has been going nowhere, then look for the following as an indicator for going short (selling) the commodity.
200 Day Moving Average
If you trade a commodity say using an exchange traded fund (ETF), the 200 DMA can be a very useful indicator for support and resistance. So when the price of the commodity ETF has moved below the 200 DMA and so broken the effective support level, you could sell the ETF.
And if the ETF approaches the 200 DMA from below the resistance line this would be a signal to buy that commodity fund.
The DMA, whether it is over different timescales such as a 15 day, 50 day, 200 or 400 day period, is a very helpful trading tool as part of the commodity trader’s strategy.
It can be used along with Fibonacci levels, Japanese candlesticks, support and resistance lines, relative strength index and Elliott Wave formations.
Many systems utilise the moving average as a guide for where to place stops and so helps as part of the trading discipline strategy as well as contributing to a healthy trading psychology.
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