HOW TO TRADE MOVING AVERAGES

HOW TO TRADE MOVING AVERAGES


Here are 15 ways you can manage opportunity through moving averages:

1. The 20-day moving average commonly marks the short-term trend, the 50-day moving average the intermediate trend, and the 200-day moving average the long-term trend of the market.

2. These three settings represent natural boundaries for price pullbacks. Two forces empower those averages: First, they define levels where profit- and loss-taking should ebb following strong price movement. Second, their common recognition draws a crowd that perpetrates a self-fulfilling event whenever price approaches.

3. Moving averages generate false signals during range-bound markets because they're trend-following indicators that measure upward or downward momentum. They lose their power in any environment that shows a slow rate of price change.

4. The characteristic of moving averages changes as they flatten and roll over. The turn of an average toward horizontal signifies a loss of momentum for that time frame. This increases the odds that price will cross the average with relative ease. When a set of averages flatline and draw close to one another, price often swivels back and forth across the axis in a noisy pattern.

5. Moving averages emit continuous signals because they're plotted right on top of price. Their relative correlation with price development changes with each bar. They also exhibit active convergence-divergence relationships with all other forms of support and resistance.

6. Use exponential moving averages, or EMAs, for longer time frames but shift down to simple moving averages, or SMAs, for shorter ones. EMAs apply more weight to recent price change, while SMAs view each data point equally.

7. Short-term SMAs let traders spy on other market participants. The public uses simple moving average settings because they don't understand EMAs. Good intraday signals rely more on how the competition thinks than the technicals of the moment.

8. Place five-, eight- and 13-bar SMAs on intraday charts to measure short-term trend strength. In strong moves, the averages will line up and point in the same direction. But they flip over one at a time at highs and lows, until price finally surges through in the other direction.

9. Price location in relation to the 200-day moving average determines long-term investor psychology. Bulls live above the 200-day moving average, while bears live below it. Sellers eat up rallies below this line in the sand, while buyers come to the rescue above it.

10. When the 50-day moving average pierces the 200-day moving average in either direction, it predicts a substantial shift in buying and selling behavior. The 50-day moving average rising above the 200-day moving average is called a Golden Cross, while the bearish piercing is called a Death Cross.

11. It's harder for price to break above a declining moving average than a rising moving average. Conversely, it's harder for price to drop through a rising moving average than a declining moving average.

12. Moving averages set to different time frames reveal trend velocity through their relationships with each other. Measure this with a classic Moving Average-Convergence-Divergence (MACD) indicator, or apply multiple averages to your charts and watch how they spread or contract over different time.

13. Place a 60-day volume moving average across green and red volume histograms in the lower chart pane to identify when specific sessions draw unexpected interest. The slope of the average also identifies hidden buying and selling pressure.

14. Don't use long-term moving averages to make short-term predictions because they force important data to lag current events. A trend may already be mature and nearing its end by the time a specific moving average issues a buy or sell signal.

15. Support and resistance mechanics develop between moving averages as they flip and roll. Look for one average to bounce on the other average, rather than break through it immediately. After a crossover finally takes place, that level becomes support or resistance for future price movement.

Good writeup TATrader

I always considered MA to be one of the most robust indicators in Technical Analysis!

The sensex could fall to its 200 day moving average which is at 5060.

The last time the bse sensex took support at its 26 week ema.

It could take support this time too at 5495.00

This is really good write-up which gives valuable guidance on MAs. I would request to throw some light on use of Weighted Moving Averages as well as Bollinger Bands( with 2/3/4 Std Deviations )

M R Shah , FIE
Chartered Engineer

Weighted Moving Average

The theory behind a weighted moving average (WMA) is that the recent data is more relevant than past data. Therefore, it puts more "weight" on the recent data and less weight on the older data. To calculate it, you take the number of periods you wish to analyze and that becomes the weight for today's price. Yesterday's price would use today's weight -1 and so on and so forth for the number of periods. You then divide the sum of the weighted prices by the sum of the weights.

A weighted moving average is designed to put more weight on recent data and less weight on past data. A weighted moving average is calculated by multiplying each of the previous day's data by a weight. The calculation belowshows the calculation of a 5-day weighted moving average.

The weight is based on the number of days in the moving average. In the above example, the weight on the first day is 1.0 while the value on the most recent day is 5.0. This gives five times more weight to today's price than the price five days ago.

Calculation of Weighted moving average

Day # Weight Price Weighted Average
1 1 * 25.00 = 25.00
2 2 * 26.00 = 52.00
3 3 * 28.00 = 84.00
4 4 * 25.00 = 100.00
5 5 * 29.00 = 145.00
Totals: 15 * 133.00 = 406.00 / 15 = 27.067

Bollinger bands are used to study the volatility of the stock.
Three bands are drawn. An SMA of 20 in the middle and and upper and lower band each of SMA +/- 2 Std. Devn.

Sharp increase or decrease in price will cause widening of the upper and lower bands.

Although getting buy/sell signals directly from a study of the bands is difficult, together with other indicators it will generally give good indication of a reversal. Especially double top sell and double bottom buy.

20 day SMA and 2 SD is used for intermediate trading. For short term 10 day SMA and for long term 50 day SMA is used.

3 SD draws really huge bands, so use it only if you are studying extremely long periods with 200 day SMA and where the price shows extreme volatility.

As far as day trading goes I have no idea if bollinger bands work.

Bollinger Bands work well if you observes precisely.
Whenever price crosses Upperband, it will immediately go down within next day as well as if crosses below band it must go upward. But take care that You must take 20 period EMA and std deviation of 2.

thats a good 1 for MA

Good Article.

Moving Averages Crossovers can also be used for better trades.

Moving Averages are mainly used in trending markets, they give less results in rangebound markets.