When it comes to stocks trading or intraday trading, Moving Averages have great importance. But the trader should know how to use moving averages effectively. Mostly the following Moving Averages are used in Stocks , Commodity and Forex Trading and also in Intraday Trading:-
1. 20 Period Simple Moving Average
2. 50 Period Simple Moving Average
3. 100 Period Simple Moving Average
4. 200 Period Simple Moving Average
Moving Average Crossover : How to Trade ?
This is also very popular concept when a trader choose to trade on the basis of Moving Averages. The Moving Average Crossover means when the smaller period moving average cross over or above or below the big period moving average. However, in a rangebound market, the moving average crossover is not beneficial. There are other indicators which should be used with Moving Average.
In the above chart we can see that many crossover have been made when the market was rangebound. After consolidating in the rangebound area, the market brokeout and thereafter there were buying points at A, B & C when the price of crude oil came near the 20 period SMA.
What is the difference between Simple Moving Average and Exponential Moving Average?
The basic difference is the calculation method between the SMA and EMA. In the SMA ( Simple Moving Average ) , the price is the specific period is devided by the period. While in EMA the lastest price is given more importance then the previous prices.
Example : A 10 days SMA is just the sum of closing price for the past 10 period and the same is devided by 10.
SMA = Closing price sum of 10 period devided by period i.e. 10
Exponential Moving Average Calculation
EMA=Price(t)×k+EMA(y)×(1−k)
Here t= today, y = yesterday, k= 2/(n+1), N= number of days.
Well, the Exponential Moving Average is faster then the Simple Moving Average and has great potential in detecting the entry or exit from the trade.
In the above chart, we have plotted 2 moving averages, 20 period EMA ( White) and 20 period SMA ( Red). Whenever EMA is above SMA, it means the momentum of the market is high on the buy side. At Point A, B , the EMA was above SMA and the price came near the moving average, which was the buy signal with stoploss of last candle low. At Point C , we can see that the EMA has crossed below SMA , hence no further buy signals. The benefit of using such EMA Vs SMA is that we buy the momentum in the direction of the trend.
What is the best Moving Average for Intraday?
The answer to find Best Moving Average depends on the trading style of the trader. It is better to understand first whether the trader is a intraday trader or day trader or scalper. For scalping intraday, 20 period SMA with 20 period EMA is best and gives good results. For a longer period 50 period SMA with 50 period EMA is best. And for long term investments , a 200 period SMA with 200 period EMA is best.
You may notice that we are suggesting same period SMA and EMA for any trading Setup. It is because, when we choose 20 period SMA with 50 period SMA crossover, it gives many false signals. But when we use the same period SMA with EMA , the false signals reduced very much. Infact, this concept has been developed by us and being traded effeciently. Here on this website , we only provide such trading setups which we have traded and found good for any trader. For more information you may go though our course “BLACK BOX ” trading system.
Importance of 3 period Moving Average?
A 3 period SMA has very good importance in scalping or trading intraday. The basic concept of using 3 period moving average is based on Candlestick Pattern which is called 123 Candlesticks Pattern. Basically you may experince from the trading that most of the stocks and commodity , when in trend, give respect to the last third candle price. When in uptrend the last third candle low is maintained as “Stoploss” or Trailing Stoploss. In the same way , when there is downtrend, the last third candle high is maintained as “Stoploss” or Trailing Stoploss”.
Use of Moving Average as Support and Resistence?
The Moving Averages can be used as Support and Resistence in a trending market. The trader can see which moving average is being given respect by the stock or commodity and thereafter, the trader can buy or sell when the price of the stock or commodity retrace near the SMA. The stoploss would be the last 3rd candle low (in uptred ) and last 3rd candle high ( in downtrend )
How to Recognise a Trend in Stock or commodity?
the trader can recognise the trend in any stock or commodity by placing Simple Moving Average or Exponential Moving Average of 20 period ( for intraday scalping ), 50 period ( for intraday longer period or day trading ) , 200 period for Investment trading.
In the above chart , we can see the moving average are sloping upward and the price of the crude oil is respecting the 20 period moving average. In this way we can easily know the direction of the trend.
How to use Moving Average for Booking Profit in stocks or forex?
Every trader face this problem how to book profit in a trade. The trader may use various method for booking the profits. However, if the trader rely on the Moving Average, he can use the 3 period SMA as the Trailing Stoploss or booking profit in his trade.
The trader can also use Bollinger Bands for booking the profit in his trade. When in uptrend, the trader can book his profit when the price touches the upper band of the Bollinger Band. In the same way , in downtrend, When the price touches the lower band of the Bollinger Band, the trader may close his trade. But by using this Bollinger Band method, the trader get out of his trade very early and loose the long profits when the market goes in trend. However, the Bollinger Band booking profit strategy may be used best for intraday scalper because intraday traders usually trade for small profits.
In the same way , in downtrend, When the price touches the lower band of the Bollinger Band, the trader may close his trade. But by using this Bollinger Band method, the trader get out of his trade very early and loose the long profits when the market goes in trend. However, the Bollinger Band booking profit strategy may be used best for intraday scalper because intraday traders usually trade for small profits.
Using many period moving Average together ?
This concept has been known as the Daryl Guppy Trend Trading. In this , Short period Moving Average like 3, 5, 10, 20 period EMA are used with 50, 80, 100, 150 period SMA. The benefit of using such moving average together is that when the market is not in trend, all the moving average mash with each other and no clear direction is seen on the stocks chart or commodity chart. However, I dont use this method for trading. The trader may get an edge when he wants to know the Trend of the stocks or commodity.
In the above chart white lines are SMA 3,5,10,20 period and red line are 50, 80, 100, 150 SMA. We can see the trend is upward and there are buying opportunities at Point A B C above because the price as well as whitelines are above the red lines.
We are not considering Point D as buying opportunity because we can see the gap between the red lines became narrower which means decline of momentum. As the momentum declined, the price of crude started turning down which was reversal point.
Charlie 