Moving averages are a part of many traders' analysis tools. A question I usually get from students is, "What period moving average is best to use?" While there is no one moving average that is perfect and will work all the time, there is a way to identify the best average for the security and time frame that we are trading.
All securities have cycles that affect the price movement. If we can identify the cycle that is dominating our stock, we can identify with a higher probability when tops and bottoms in price will occur and when we should buy or sell our stock. Cycles are measured from trough to trough. The troughs are the low points in price that correspond with the lows in the cycle. While this sounds complicated, there is a tool built into TradeStation that assists us in finding the right cycle for our security and the time frame.

Looking at the daily chart of the SPY (the ETF for the S&P 500), we can see that the stock seems to make bottoms at a fairly regular interval.

We can then select the time cycle tool on our platform and start from a major low. The tool will default to arches, but I prefer lines as seen on my chart. To switch to the lines, you simply right click on the cycle arc and deselect arc on the pop-up menu. You can also change the color from that menu as well. You will then need to click on one of the lines and drag it to another bottom in price. Look to see that the resulting lines match up with most of the bottoms. You will not always have every bottom matched, but a majority is what you want.

When we are using moving averages, we acknowledge that it is an average of price and that price will move away from that average and revert back during a trend. The average should be much like the black line dissecting the cycle I drew in Figure 1 of this article. We want an average that is half the length of the cycle so that it will show our peaks and troughs as movements from and to the average itself.
In an uptrend, we should see prices move away from the average only to snap back to them when the trough of the cycle occurs. If we are changing to a downtrend, then the average would be violated and the price would bounce off of it to the downside before returning during peaks in the cycle. If the average is being violated in both directions, then we do not have a strong trend in that time frame.

By using the right average for the time frame you are trading, you can increase your odds for success. Just be careful to check the cycle from time to time as cycles can change with market conditions. We need to adapt with the markets for maximum success. Until next time, trade safe and trade well!
This content is intended to provide educational information only. This information should not be construed as individual or customized legal, tax, financial or investment services. As each individual's situation is unique, a qualified professional should be consulted before making legal, tax, financial and investment decisions. The educational information provided in this article does not comprise any course or a part of any course that may be used as an educational credit for any certification purpose and will not prepare any User to be accredited for any licenses in any industry and will not prepare any User to get a job. Reproduced by permission from OTAcademy.com click here for Terms of Use: https://www.otacademy.com/about/terms
Editors’ Picks
AUD/USD holding above 0.6900 but not for long

The AUD/USD pair eased on Monday and trades a handful of pips above the 0.6900 mark. Investors remain cautious amid recession fears and a scarce macroeconomic calendar. Additional clues on economic growth and inflation are scheduled for later this week.
EUR/USD up on Monday, but unable to recapture 1.0600

Bulls are still losing the battle around the 1.0600, as EUR/USD pulled back after reaching a two-week high of 1.0614. Market players eye inflation-related figures and policymakers' words on monetary policy within the ECB Central Banking Forum.
Gold bears gearing up for a breakout

XAUUSD is slowly gaining bearish traction, with sellers now aligned at lower levels. Gold advanced throughout the first half of the day, but trimmed gains and trades near a daily low of $1,820.63, as the dollar gathered momentum ahead of the US opening.
Terra’s LUNA price finally shows the buy signal you’ve been waiting for

Terra’s LUNA price shows optimism to start the final week of June. The potential for a new bull run is beginning to materialize. LUNA price sees an uptick in social media commentary.
FXStreet Premium users exceed expectations
_XtraSmall.png)
Tap into our 20 years Forex trading experience and get ahead of the markets. Maximize our actionable content, be part of our community, and chat with our experts. Join FXStreet Premium today!
RECOMMENDED LESSONS
Making money in forex is easy if you know how the bankers trade!
Discover how to make money in forex is easy if you know how the bankers trade!
5 Forex News Events You Need To Know
In the fast moving world of currency markets, it is extremely important for new traders to know the list of important forex news...
Top 10 Chart Patterns Every Trader Should Know
Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and...
7 Ways to Avoid Forex Scams
The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?
What Are the 10 Fatal Mistakes Traders Make
Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.