Two Period Moving Average

The two-period moving average is a simple moving average of two most recent prices. For example, if the closing price yesterday was 1.302 and the closing price today is 1.304, the two-period moving average will be 1.303. This moving average roughly fits the line chart in technical analysis and does not have a huge implementation. The two-period moving average is a technical analysis approach for trading. Its purpose is to generate buy and sell signals for your trades. The moving average is a trend-following indicator that always tracks price movement.

What is the Two Period Moving Average?

The Two Period Moving Average is a technical analysis tool for generating buy and sell signals while trading. It is computed by adding today’s and yesterday’s closing prices and then dividing the total by two. The two-period moving average (2-period SMA) is a good tool for technical analysis, particularly for traders who want to incorporate moving averages in their trading approach. A moving average line displays how fast or slow a stock has been moving over time; it is an average line that shows investors what prices have been on any given chart or graph over past periods of time.

Setting up the Two Period Moving Average
Setting up the Two Period Moving Average

Two Period Moving Average Strategy

The Moving Average line provides a snapshot of the market’s trend direction. You merely need to determine if the price will remain above or below the indicator level. When the price rises over its current moving average, it could be considered as a bullish trend indication. During a bullish trend condition, the price usually remains above the indication level.  During a bullish advance, the optimal time to go long is when the price rebounds to the MA line. Because a price rejection of the trendline support indicates that the market is poised to resume its current bullish advance. The price remains below the moving average line during a bearish trend move. If you intend to go short after a decline, you may want to ensure the price pulls back to the indicator line and treats it as resistance.

Buy Signal

This could be your checklist for a buy trade:

  • When price is trading above the Moving Average.

Once this event occurs:

  • You could open a buy position after you confirm your entry with bullish candlestick patterns.
  • You could set your stop loss just below the nearest swing low.
  • You could set your take profit at the nearest resistance zone, or you could exit trade when price falls below the Moving Average.
  • For good risk management, I would only consider trades with a risk to reward ratio of at least 1:2.
Two Period Moving Average Buy Setup
Two Period Moving Average Buy Setup

Sell Signal

This could be your checklist for a sell trade:

  • When price is trading below the Moving Average.

Once this event occurs:

  • You could open a sell position after you confirm your entry with bearish candlestick patterns.
  • You could set your stop loss just above the nearest swing high.
  • You could set your take profit at the nearest support zone, or you could exit trade when price rises above the Moving Average.
  • For good risk management, I would only consider trades with a risk to reward ratio of at least 1:2.
Two Period Moving Average Sell Setup
Two Period Moving Average Sell Setup

Two Period Moving Average Pros & Cons

Pros

  • The Two Period Moving Average may be used to determine market momentum.
  • This indicator could also serve as dynamic support and resistance levels.

Cons

  • The Two Period Moving Average may sometimes have lagging issues when generating signals.
  • The indicator may not meet the trader’s expectations when used on smaller timeframes.

Conclusion

The Two Period Moving Average is one of the common indicators which traders use to follow trends. To calculate the two-period moving average, add today’s and yesterday’s closing prices and divide the total by two. So, if the closing price today is $100 and the closing price yesterday was $99, your 2-day moving average is 100 + 99 / 2 = 100.50, or $100 per share.

The moving average is already one of the most prominent trend indicators in the forex and stock markets due to its ease of use and obvious illustration of trend signals. It provides trend signs as well as intraday price breakout levels and dynamic support/resistance zones. So, if you want a simple but versatile trend indicator, the Moving Average is worth a shot, though your expectations should be kept in check because the indicator doesn’t guarantee profits.