Moving averages are often used in different trading systems. The book entitled Secrets of Mastery from a Professional Trader offers a thorough analysis of what is recommended by aclassical authors on stock exchange trading as regards using moving averages.
Let's take one of them as an illustration. Jack Schwager puts is this way in his Technical Analysis. Complete Guide: "Moving averages in markets with a pronounced tendency are a very simple and effective way of establishing it…".
Perfect, everything's simple - we just look at how the moving average behaves and make trading decisions based on 'a very simple and effective' method of discovering a tendency. Let's take a trading instrument to illustrate what Schwager suggested, for example, GBPUSD, add a 40-period moving average and see the trading signals he describes for points where the price crosses the moving average: to buy where the moving average turns up and to sell when it points down.
Have a look at the wonderful results this approach generated... during a trend. Let's take a slightly different example.
Where are the simplicity and wonderful results gone? What will happen to your account after such a trading period? Nobody claims moving averages cannot be used in trading. The main question is HOW???
I suggest answering the following questions:
1. Why do authors of classical literature on technical analysis fail to find an equally 'simple and effective' filter of false signals generated by the crossing of moving averages?
2. What should be corrected in the classical approach to using moving averages?
3. How should moving averages be used in trading?
You can find tips in Chapter 9 of Secrets of Mastery from a Professional Trader.
