resistance levels around the moving average instead, similar to taking a double top
or bottom breakout when a bullish or bearish trendline is violated in point and
figure charting.
(5) as Central Value for envelopes and bands
Moving averages also act as central values for envelopes and bands, which at-
tempt to contain price action (volatility) within a well-defined region. This is use-
ful in gauging the relative levels of overextension or overreaction in the markets.
The market is overbought if prices test or exceed the upper band and is oversold
if prices test or fall below the lower band.
(6) as trend identifier
One effective way of determining the general strength of a trend is to see if all
the moving averages are pointing in the same direction. As long as the short-,
medium-, and longer-term moving averages are all pointing in the direction
of the existing trend, the trader may continue to initiate entries in the direc-
tion of the trend. Once the shorter-term moving averages start to turn or cross
over a longer-term moving average, the trader should start to take defensive
measures.
It is sometimes convenient and advantageous to observe the short-,
medium-, and longer-term moving averages on the same chart. Setting up a
chart to display multiple timeframe moving averages is fairly straightforward.
Let us use a 5-min chart to illustrate the technique. To display the one-hour
moving average on a 5-min chart, simply divide the duration of moving average
figure 11.28 Triple Moving Average Crossover on the Daily of GBPUSD.
Source: MetaTrader 4