Using MAs with Other Indicators

Imagine having one tool that not only indicates the trend and warns of potential reversals but also assists you in formulating the most appropriate plans for your trades - pretty neat. However, MAs (Moving Averages), while being easily one of the best tools in technical analysis and the very reason many traders have seen success, can sometimes create false signals if you solely depend on them.

This is precisely why MAs, in conjunction with other confirming indicators, can be very powerful. In this article, we will explore the use of moving averages in conjunction with other technical indicators to confirm trends, identify entry and exit points, and develop a more effective trading plan.

By the end of this article, you will have a practical understanding of how to use MAs with indicators like RSI, MACD, Bollinger Bands, etc, to give you an edge in all market conditions.

Understanding Moving Averages (MAs)

It is essential that you fully understand how moving averages work before combining them with other indicators.

•  Simple Moving Average (SMA): Gives you an average closing price over a specific period. SMAs help get a long-term view of support/resistance zones.

•  Exponential Moving Average (EMA): Gives more weight to prices that occurred more recently. EMAs are better suited for short-term trades, as they react faster than averages.

MAs indicate where trends are heading and provide dynamic support/resistance levels, becoming even more powerful when combined with indicators as confirming indicators.

Why Combine Moving Averages with Other Indicators

Unfortunately, relying on the MA can cause whipsaws. Whipsaws occur when the price crosses the MA above or below and then quickly reverses.

If you use MAs with indicators, then you can:

•  Have more confirmation of a trend before taking a trade.

•  Eliminate false signals in volatile environments.

•  Identify entry and exit points that have a higher probability of success for your trade.

•  Build layers for a multi-faceted trading approach, depending on market conditions.

Using MAs with RSI (Relative Strength Index)

The RSI measures price momentum, indicating how strong or weak the trend has been, and whether it is currently overbought or oversold. Price hitting the top or bottom of the RSI indicates extreme buying or selling. This is not only indicated by a reading over 70 for buying and below 30 for selling, but also by extreme selling based on price level analysis.}

- Price usually doesn't go above 70 or below 30 regularly. So if we can get a price bounce above a 50 EMA, and then the RSI crosses above 30 from the oversold range, that is a strong buy opportunity.

- If there is a price rejection off the MA, and price moves down to the oversold condition and the RSI crosses below 70 from the oversold range, then we can expect a price reversal.

Pro tip: When you use a short-term EMA with RSI, you can find quick trend pullback opportunities while skipping the false moves.

Using MAs with MACD (Moving Average Convergence Divergence)

MACD uses EMAs to determine the trend's strength and momentum. They also work well in conjunction with traditional moving averages.

- When the price crosses above the 50 EMA, and the MACD histogram turns positive, that is a confirmation of a trend.

- If price breaks below the 200 SMA, and the MACD line crosses below the signal line, then we can expect a strong bearish setup.

This is an excellent combination if you are looking for confirmation to act upon and you want to enter the trade in a trending environment.

Incorporating Bollinger Bands with MAs

Bollinger Bands have a built-in SMA (simple moving average) plus two standard deviations above and below, and are therefore naturally suited to use with MAs.

• The middle band (SMA) acts as dynamic support when trends pull back to price and bounce.

• When price touches the upper band and bounces back down while at the same time being below a short EMA, it often leads to a possible price reversal.

Using Bollinger Bands with MAs expands your ability to identify breakout setups and avoid chasing false moves.

Using MAs with the Stochastic Oscillator

The Stochastic Oscillator can help to identify trends in momentum and works exceptionally well in conjunction with MAs:

• Look for bullish crossovers of the stochastic lines when the price is above a 50 EMA, which is a strong sign that the trend will continue.

• In downtrends, a stochastic move down below the overbought levels, while the price is still below the MA, provides a strong high probability short trade setup.

MA Strategies on Multiple Timeframes

Often, having one MA setup on a single chart can be misleading. That is why combining MAs with multi-timeframe analysis can give traders an edge.

• Look at the 200 SMA on a daily chart to determine the overall trend.

• Look at a 20 EMA on a 4-hour chart to make precise entries.

• When the short-term pullbacks/trends align with the overall trend, your setup becomes a far more reliable trade setup.

8. Confluence: The Key to High-Probability Trading

A powerful concept in trading is the concept of confluence, when multiple technical signals overlap:

• For example: Price soon approaches the 50 EMA near a Fibonacci retracement level, and RSI just exited the oversold territory.

• This overlap of signals builds a stronger case for entering the trade.

When you have more confirming signals around your MA, your probability will be much higher.

Not Making Mistakes by Combining Indicators

Although combining your MAs with other tools can help improve accuracy, overloading your charts to the extreme can yield the opposite effect. Be mindful of these mistakes:

• Using too many indicators → I suggest only using 2-3 because you will be clearer.

• Disregarding price action → Always remember that indicators should confirm an analysis or bias, not develop or replace it.

• Force trading setups → Be patient and wait for the MAs to align with the indicators, and do not rely on crossing alone.

• Neglecting market conditions → MAs do not play a significant part in markets that are trending sideways. Rely more on an oscillator like RSI.

A Real WC Example

Now, picture yourself trading Ethereum:

• The 50 EMA is above the 200 SMA, demonstrating a strong uptrend.

• RSI just bounced from 40 and is moving upward.

• MACD histogram last week was the first week flipped to positive.

All three of these signals lined up, creating a textbook high-probability long setup. You enter a long buy position, you place your stop-loss order below the 50 EMA, and set your target near the next resistance.

The layering effect of trading strategies strongly encouraged trades with confidence.

Conclusion

When MAs are paired with indicators (RSI, MACD, Bollinger bands, buyers' sales, stochastic indicator, etc.), they are a larger trading system.

To summarize:

• MAs to identify a trend

• Pairing with oscillators to identify if the price will reverse

• Using with Bollinger bands or Fibonacci levels to search for high probability entry

• Always look for confluence from multiple indicators

By mastering this approach, you will be able to trade in a more strategic manner, with more accuracy, more confidence, and consequently better results and performance regardless of market conditions.