Moving Averages And Over-Extension

Moving averages (MAs) are perhaps the most simple and also widely used indicators of them all. They can be applied to any market or time frame. The most common variants are the 20, 50 and 200 period moving average, though many traders use other settings equally successfully as the settings are less important than how you yourself use them and how they fit into your own trading strategy.

Moving averages are great for clarifying trend and its strength, but the real power is in spotting over-extension and hence when it might not be a good time to buy or sell. It is easiest to think of the over-extension of price from a moving average like the stretching of an elastic band. When the band is fully stretched it can stretch no further and all it wants to do is contract i.e. price is more likely to move or even possibly ‘snap’ back to its normal resting state (the moving average line).

Trading with the trend

2 thoughts on Moving Averages And Over-Extension

  1. Nick, thank you for your comprehensive simple and clear video tutorials. This website is brilliant!

    1. Many thanks Liesbeth, we aim to please!

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