Are you looking for the “Best Moving Average”? This is one of the most asked questions by the traders so I decided to provide a detailed guideline for selecting the Best Moving Average and Indicator Setting for Your Trading. In addition to this, we will let you learn how you can use 10 days moving average for your profit maximization. All you need to do is just spare some of your time to read our guidelines and implement this simple guide to your trading strategy. However, the technique you learn here would be applicable for any indicator because fundamental rules are the same.
Doubtlessly, moving averages are among the most popular trading tools. Moving averages are great only if you know and learn how to use them for your profit maximization. Unfortunately, most of the traders make some serious mistakes when using moving averages for trading. This article helps you in learning what you need to know when it comes to choosing the type and the length of the perfect moving average. Moreover, I will tell you the 3 ways how to use moving averages to make your trading decisions for maximum profits and risk-free trading.
So, here is our guide for Best Moving Average and Indicator Setting for Your Trading.
First Step – Low, Medium, High?
It is a real confusing decision especially for beginners and fresh trader that whether they should use the EMA (exponential moving average) or the SMA (simple/smoothed moving average). The reason behind this confusion is because the differences between the two are usually subtle.
However, the choice of the moving average can cause a great profit and make a big impact on your trading. Whatever is your moving average, the Stochastic or the MACD indicator? You always have following three settings for your indicators,
- A fast or slow period setting
- A medium or medium period setting
- A Slow or high period setting
Here we are going to mention few examples about the moving averages.
- Fast – anything from the 5 period to the 15 period
- Medium – anything from 20 period until 50
- Slow – Above 50 with 100 and 200 like famous long-term moving averages
How EMA is different from SMA
EMA is different from SMA only in one aspect which is speed. The EMA moves much faster and it changes its direction earlier as compare to SMA. The EMA gives more consideration to the recent price action. It means that when price changes direction, the EMA recognizes this sooner. However, SMA takes longer time to signal the price turns.
Plus and Minuses
Technically speaking, there is no better or worse when it comes to EMA vs. SMA. One has no advantage over other. The positives of the EMA are also its negatives.
Here I will explain why.
The EMA shows reaction much faster when the price is changing its direction. But this also means that the EMA is also more vulnerable to giving wrong signals too early. For example, when the price retraces lower during a rally, the EMA will start moving down on a very immediate basis and it can cause signals too early. On the other hand, SMA moves much slower and it can keep you in trades longer when there is short-term price movement. Arguably, this also shows that the SMA gets you in trades later than the EMA.
At last, it totally depends upon what you feel comfortable with and what is your trading style. Doubtlessly, The EMA provides earlier signals, but it also gives you more false and premature signals at the same time. On the other hand, SMA late and comparatively correct signals during volatile times.
Second Step – What is your desired result from the moving averages?
It is a common observation that most of the traders ask for the moving averages but they are unaware of their goal and target with these tools. Usually, traders use moving averages to determine the trend direction, trade time entries and they utilize them to exit or targets and stop trade. But here we are going to brief in detail about moving averages and how to use them to get your desired goals.
It is pertinent to mention that I consider myself as a medium term swing trader. Means I usually trade for the anything between the 12 hours and multiple days. So, I use a the moving average that helps me in my trading that helps me in and causes profits in my medium term trading actions. This is because a fast moving average causes too much noise and too many signals. On the other hand a fast moving trading generates signals with remarkably delay.
Personally, I don’t prefer to move too near to one extreme because I settled right in the middle by choosing a 20 period SMA. Probably, this is the most fruitful moving average. However, it works very well only for my entry timing, trade filtering etc purposes. This is because ii am not interested in holding the excessively long trades.
After selecting the type of moving average, traders may ask themselves which period setting is the right for them and gives them the best signals for maximum benefit.
You have to consider these two factors.
- You have to determine either you are a swing or a day trader.
- What is the purpose and why you are using moving averages.
The mandatory outcome
More than anything, moving midpoints “work” since they are an unavoidable outcome, which implies that value activity regards moving midpoints on the grounds that endless dealers use them in their own trading. This rises a significant moment that trading with markers:
You need to adhere to the most regularly utilized moving midpoints to get the best outcomes. Moving midpoints work when a great deal of brokers use and follow up on their signs. In this manner, go with the group and just utilize the well known moving midpoints.
The best moving normal periods for Day-Trading
At the point when you are a transient informal investor, you need a moving normal that is quick and responds to value changes right away. That is the reason it’s generally best for informal investors to stay with EMAs in any case.
With regards to the period and the length, there are typically 3 explicit moving midpoints you should consider utilizing:
- 9 or 10 period: Very mainstream and amazingly quick moving. Regularly utilized as a directional channel (all the more later)
- 21 period: Medium-term and the most precise moving normal. Great with regards to riding patterns
- 50 period: Long-term moving normal and most appropriate for recognizing the more drawn out term course
Most profitable periods for swing traders
Swing traders have a totally different methodology and they regularly trade for the higher time frames (4H, Daily +) and furthermore hold trades for longer timeframes. Accordingly, swing-traders should initially pick an SMA and furthermore utilize higher period moving midpoints to keep away from the commotion and untimely signals. Here are 4 moving averages that are especially significant for swing traders:
- 20/21 period: The 21 moving normal is my favored decision with regards to momentary swing trading. During patterns, value regards it so well and it additionally flags pattern shifts.
- 50 period: The 50 moving normal is the standard swing-trading moving average and well known. Most of the traders use it to ride patterns since it’s the ideal trade between too short and too long moves.
- 100 period: The most prominent feature of the 100 periods is that unquestionably remains constant with regards to the 100 moving average. It functions admirably for support and resistance – particularly on every day and additionally week by week time period
- 200/250 period: similar remains constant for the 200 moving average. The 250 period moving average is mainstream on the everyday chart since it portrays one year of value activity (one year has approximately 250 trading days)
Third Step – Optimize Your Decision in a Timely Manner
We all are well aware of the fact that overthinking leaves you confused and detracted. So, do not overthinking and do not go for over-optimization, while taking decisions for your trading actions.
Doubtlessly, moving averages and indicators are best tools for your trading decisions. However, if you do not agree, you may probably be using the wrong strategy to use moving averages.
Below mentioned are some of the common mistakes people doing when they are using moving averages for their trade decisions.
- Usually, people try to use too many moving averages and create a mess. Consequently, they fall into confusion and may stick into analysis. This is vital thing for you to learn that you cannot create an ideal system.
- Creation of a lot of noise and too many signals by using the changing indicators in response to changing markets.
So, in response to these common mistakes, I will emphasize that you cannot create an ideal system. Hence, you should hunt for an ideal system. The most important learning for becoming a successful trader is to learn to live with your flaws. All you need to learn is that when and how to manage the loss and when you should decide not to trade in the market.
Now that you know about the differences between the moving averages and how to choose the right setting for a specific period, we can move to the 3 ways moving averages can be used to help you find trades, ride trends and exit trades in a very best way.
Trend direction and filter
Market Wizard Marty Schwartz was one of the most popular traders. He was a big supporter of the use of moving averages for the selection of the moving trends. Here is what he said,
“The 10 day exponential moving average (EMA) is my favorite indicator to determine the trend into the market. I call this “red light, green light” because it is imperative in trading to remain on the correct side of a moving average to give you the best chances of success in market. When you are trading above the 10 day, you have the green light, the market is in positive direction and you should be considering buying. Contrarily, trading below the average is a red light. The market is in a negative direction and you should be thinking about sell.” – Marty Schwartz
So, Marty Schwartz used a fast EMA to hold the position on the right side of the market and to eradicate the trades in the wrong direction. Just this one tip can make a remarkable difference in your trading when you only start trading and are a beginner with the trend in the correct direction.
The Golden Cross and the Death Cross
Even as a as swing traders you can use moving averages as directional filters. The Golden and Death Cross is a signal that occurs when the 200-period and 50-period moving average cross and they are main factors on the daily charts.
As given in the below chart highlights the Golden and Death cross entries. Actually, you would make an entry to short when the 50 crosses the 200 and make an entry to long when the 50 crosses above the 200 periods moving average. The screenshot only shows a specific and limited timeframe, you can see that the moving average cross-over can help you in your analysis and chose the right market direction.
Identify the Support and resistance
The second most important thing moving averages help you is support and resistance. You can often see that the famous and prominent moving averages work perfectly as support and resistance levels.
Support and Resistance Explained
Undoubtedly, the concepts of trading level support and resistance are two of the mostly discussed factors of technical analysis. They are integrated and essential part of analysis charts patterns. These terms are used by traders to indicate the price levels on charts. Moreover, they are used identify the trends to act as barriers, avoiding the price of an asset from going in a specific direction.
Firstly, the detail and idea of identifying these levels may look easy, but as you’ll find out, support and resistance can come in various forms, and the concept is tougher to understand than it first looks.
Support is a price level where a downward trend can be expected to stop due to an increase in demand or buying trend. As the price of assets declines, demand for the shares goes up. So, trends form the support line. Meanwhile, resistance zones came into existence owing to selling trend when prices have increased.
Once you have identified an area or “zone” of support or resistance, price levels can give signals for potential entry or exit points. This is because a price touches a point of support or resistance, it will go either of two ways—revert back from the support or resistance point, or deviate the price level and keeps in its direction. It will keep doing so until it hits the next support or resistance level.
However, some trade’s timing is solely dependent on the belief that it will not break the support and resistance zones. Whether support or resistance level halted the price, or it breaks through, traders can “bet” on the direction and can quickly determine if they are moving in the right direction. However, if the goes in the wrong direction, you can close the position at minimum loss. Contrarily, if the price goes in the right direction, move may be substantial.
Experienced traders have a lot of stories about how specific price levels tend to prevent traders from the price of an underlying asset in a specific direction. For example, suppose Jim was having a position in stock market between March and November and that he was expecting the value of the shares to go up.
Now just imagine that Jim paid attention that the price drops to get above the $40 multiple times over few months. Even though it has gotten very close to moving above that level but still it goes above the $40 multiple times. Specifically in this case, traders would call the price level near $40 a level of resistance. It is evident from the chart below that resistance levels are also considered as a capping because price levels represent areas where a rally runs out of the stock.
Support levels are on the other side of the coin. Support refers to prices on a chart that tend to act as a floor by preventing the price of an asset from being pushed downward. As you can see from the chart below, the ability to identify a level of support can also coincide with a buying opportunity because this is generally the area where market participants see value and start to push prices higher again.
These models show that consistent level keeps an asset cost from moving. This static level is one of the most well known types of support/resistance, yet the cost of assets by and large patterns upward or downtrend. So, it isn’t unprecedented to see this value hindrances change over the long haul. This is the reason the ideas of moving and trend lines are significant when finding out about help and obstruction.
At the point when the market is moving to the potential gain, resistance levels are framed as the value activity eases back and begins to move back of the trend line. This happens because of benefit taking or close term vulnerability for a specific issue or area. The subsequent value activity goes through a “level” impact, or a slight drop-off in stock cost.
Many merchants will give close consideration to the cost of a security as it drops towards the more extensive help of the trend line in light of the fact that this has been a boundary that kept the cost of the stock from moving remarkably lower. For example, as obvious from the Newmont Mining Corp (NEM) beneath, a trend line can offer support for a stock for quite a longer period of time. For this situation, notice how the trend line goes up to the cost of Newmont’s offers for longer time.
Doubtlessly, when the market is moving to the declining, traders will search for a movement of lower highs and will try to manipulate these apexes alongside a trend line. Exactly when the famous and important methodologies the trend line, most of the traders will search for the asset for selling demand and may consider entering a short term because this is a domain that has pushed the cost slipping beforehand.
The support and resistance of the perceived levels whether or not found with a trend line or through some other methodology, is considered as more practical the more events that the expense has obviously been not ready to move past it. Various particular dealers will use their recognized assistance and resistance levels to pick key section/leave centers around the grounds that these domains consistently address the costs that are the most influential to an asset’s course. Most traders make certain at these levels in the fundamental assessment of the asset, so the volume overall forms more than anticipated, making it significantly more difficult for dealers to continue driving the worth successive.
Not in the least like the insightful money related performers portrayed by money related models, certified human sellers and monetary experts are enthusiastic, make scholarly goofs, and depend on heuristics or simple courses. In case people were sensible, support and resistance levels wouldn’t work by and by Round Numbers.
Another average aspect of support or resistance is that an assets’s cost may moving past a round number, for example, $50 or $100 per share. Most of the new traders will in general buy or sell assets when the cost is at a round number since they are bound to feel that a stock is genuinely esteemed at such levels. Most of the costs or stop orders set by either retail or multiple venture banks are put at round value levels as opposed to at costs, for example, $50.06. Since countless requests are set at similar level, these round numbers will in general go about as solid value boundaries. In the event that all the customers of a speculation bank put in sell orders at a recommended focus of, for instance, $55, it would take an outrageous number of buys to retain these deals and, in this way, a degree of opposition would be made.
Trend vs. ranges
It to keep in your mind that moving averages usually fail in the ranging markets. Price ranges back and forth between support and resistance the moving average stay usually in the between of that range and price.
The chart below is a price chart with a 50 and 21 period moving averages. As you can see that during the range, moving averages lose their validity entirely. However, as soon as the price starts trending and swinging, they precisely act as support and resistance again.
The Bollinger bands are one of the technical indicators derived from the moving averages. You can easily find the 20 periods moving average and the external Bands measure price volatility in the middle of the Bollinger Bands.
During ranges, the price oscillate around the moving average, but the outer Bands are very important to keep in your mind. When price reaches to the outer Bands in a range, foreshadows the reversal in the opponent direction when it’s followed by a rejection. So, even though moving averages lose their validity during ranges, the Bollinger Bands are a great and impressive tool that still allows you to analyze the price in an effective manner.
During trends, Bollinger Bands help you and give signal to stay in trades.
The price usually goes away from the moving average during a strong trend. But the price moves closer to the outer band. It gives the signal of change in direction when it breaks the moving average again. In addition to this, when you witness a deviation of the outer Band during a trend it often forecasts a retracement. However, it does not convey a reversal until the moving average is broken.
Fourth Step – Stick To One Plan
It is very important thing to keep in your mind that you have to show consistency. So, once you have taken your trading decisions, all you need to do is just stick to your plan. So, do not change your plan regardless of your loss or how bad you think for your chosen moving average.
Moreover, it is an important thing that you get a broader and large enough sample size. You opt for multiple trades with the single moving average then you look at all trades in as few questions from yourself. Those questions are mentioned as,
Q.1. What type of common thing my winners have, either market condition or price in relation to the moving average? How did price trade into the moving average, how did price break the moving average?
Q. 2.What your losers have in common……?
Moreover, most important thing is that you should be awake of the fact that moving average is not a miracle. So, it does not matter whether you are having 15 periods, 16 periods or a 20 period, an SMA or EMA. All you need to learn for a successful trade is that you should make consistent decisions means you should be able to make the decisions and find out when the market favors your strategy. Similarly, you should be able to assess when market is not in your favor and you should stop the trading into the market.
Looking for a Miracle?
Are you looking for the miracle? Technically speaking there are not such miracles. All you need to learn is how to use the tools for your successful and profitable trading. Here some readers would expect me to put a random number and title it as one of the best moving average. But it is again being said that selecting the right moving average is not crucial for your profit. But learning how to use the tool is a profit gaining technique. So, if you have read my article successfully and understand this point, Congratulations you are much closer to become a successful trader.
I would be talking about the hit-and-miss vs. the evidence based progress. It is pertinent to mention that if you only look for what is the best thing coming next; you would make entry into a circle that will lead you nowhere. On the other hand some of the trader thinks that they must grill themselves with hard and tough times to improve slowly. It stands true for any skill, there is no shortcut to become a master but you slowly learn the skills to become master eventually.
Best Way to Use Moving Average for Profit maximization
Most of the swing traders use technical indicators while taking the trading decisions into the market and analyzing the stocks. Unfortunately, there are thousand of the indicators from which traders have to choose the suitable and best one. So, it is really a jaw breaking job for traders especially for beginners to select for the best technical indicators. Doubtlessly, decision about the technical indicators might seem bit overwhelming and it should not be.
We have tested and evaluated plethora of the indicators to develop the guide for learning the profit earning system for traders specially swing traders. Arguably, we concluded that majority of the indicators give their expected results of increasing the odds of profit maximization through stock trade. As we already explained that going after too many indicators may yield negative results and paralyze your technical analysis. So, instead of going after so many indicators, we would be focusing on the tested and tried basics of the stock trading. We will focus on price, support, resistance levels and volume.
Most Effective and Easiest Way of Using Moving Averages
Doubtlessly, use of moving averages is one of the easiest and best tools to find the support and resistance into the market. Moving averages are the primary and vital factor of our daily stock analysis. When we are swing traders we really rely on moving averages in making decisions about the low-risk opportunities, to identify the time to exit and ETFs. If we want to measure the price momentum in the very short term of few days, we have shortlisted 5 and 10 day moving averages very fruitful.
For example, if an ETF or is trading above of its 5-day MA, you should not decide for sell. However, you can sell only if ETF made a 25 to 30 percent profit within few days.
The 10-Day Moving Average for Profit Maximization
Arguably, 10-day moving average is much better than the ultra short term of 5-day moving average. This is because 10-day MA provides us with larger “wiggle room” as compared to 5-day short term. For traders following trends, no stocks or ETFs should be sold while they are still trading above their 10-day MA following a sound breach. In order to understand why, compare the daily charts of U.S. Oil Fund ($USO) and First Trust DJ Internet Index Fund ($FDN) as given below.
Considering the exception of a brief shakeout of a common and acceptable occurrence of two days, $FDN has been holding above its rising 10-day MA ever since breaking out in early July. It is evident that the momentum from the breakout is still strong for an extended period of time. Moreover, has a look on the difference on the daily chart of $USO:
It can be seen that $USO has failed to hold above its 10-day MA over the previous week, which is a signal for the bullish momentum resulting from the previous breakout is fading. We sold 25% of our existing position on July 25. However, halting the profit for a short period of time is not a major concern on partial share size when a breakout stock or ETF has broken below its 10-day moving average. This is because most of the times this type of price action leads to a strong and in detailed correction.
We were ready to buy those shares if the price action immediately snapped back higher within one to two days (as $FDN did), immediately after selling partial share size on the break of the 10-day moving average. Since that did not occur, we canceled our buy stop and resumed to hold $USO with decreased share size and a small gain since the start of breakout.
For exiting a position, the 5 and 10-day moving averages are not a complete and perfect system in too many aspects. They allow us to remain with the trend in a profit making trade which helps us to increase our trading profits. Using the 10-day moving average as a short-term indicator of support enables us toTrade what we see not what we think.
Moving Average Envelopes Trading Strategy
Percentage-based envelopes set above and below a moving average are called Moving average envelopes. This type of moving average that is set as the foundation for the envelopes does not make a difference. So you as a trader can use either a simple, exponential or weighted MA on the basis of your easiness and comfort.
Traders should try out various rates, time stretches, and cash sets to see how they can best utilize an envelope methodology. It is generally basic to see envelopes more than 10-to 100-day time frames and utilizing “groups” that have a separation from the moving average of between 1-10% for day-to-day diagrams.
On the off chance that day trading, the envelopes will be less than 1%. On the one-minute outline beneath, the MA length is 20 and the envelopes are 0.05%. Settings, particularly the rate, may be changed from everyday depending upon unpredictability. Use settings that adjust the method below the value activity of the day.
Ideally, trade just when there is a solid generally directional bias to the cost. At that point, most traders just exchange that direction. In the event that the cost is in an upswing, consider purchasing once the value moves toward the middle-band. In a strong downtrend, considering shorting when the value moves toward the center band and afterward begins to drop away from it.
Place a stop-misfortune one pip over the new swing high that just shaped. When a long exchange is taken, place a stop-misfortune one pip underneath the swing low that just framed. Consider leaving when the value arrives at the lower band on a short exchange or the upper band on a long exchange. On the other hand, set an objective that is at any rate multiple times the danger. For instance, if gambling five pips, set an objective 10 pips from the passage.
Ribbon Trading Strategy for Moving Averages
You can use moving average ribbon to create a fundamental trading strategy. It can be used with a trend change in either upward or downward direction. The formation of the moving average ribbon was founded because more is better when it is about drawing moving averages on a chart. The ribbon is generated by a series of 8 to 15 exponential moving averages (EMAs). However, they may vary from very short-term to very long-term averages. Consequently, ribbon of averages is used to provide a signal of both the trend direction and strength. A steeper angle of the moving averages – and greater separation between them, causing the ribbon to fan out or widen – represents a strong trend.
Conventional buy or sell signals for the moving average ribbon are the same type of crossover signals. Many crossovers are involved, so a trader must choose with care and attention how many crossovers form a good trading signal.
However, you can use an alternate strategy to provide low-risk trade entries with the potential of high-profit. The strategy described below ha an objective of catching a decisive market breakout in either direction. Usually, this occurs when a market has traded in a tight and stringent range for a longer period of time.
You should consider following steps to use this strategy.
- Look for a period when all of the moving averages converge closely together. The price becomes flat into sideways range. Ideally, the multiple moving averages are so close together that they constitute almost one thick line, which I an indication of separation between the individual moving average lines.
- Mark the tight trading range with a buy sequence above the high of the range and a sell sequence below the low of the range. If the buy sequence has been started, place an initial stop-loss sequence beneath the low of the trading range. However, if the sell sequence has been started, place a stop just above the high of the range.
Moving Average Convergence Divergence Trading Strategy
The moving average convergence divergence (MACD) histogram shows the difference between two exponential moving averages (EMA), In addition to this, a nine-period EMA is drawn as an overlapping layer on the histogram. The histogram depicts the negative or positive readings in relation to a zero line. On the other hand, most often used in trading as a momentum indicator, you can use MACD to identify the market direction and trend direction. You can create a number of trading strategies using the MACD indicator. Some of the examples are here as,
- Trade the MACD and indicate line crossovers. In the context of trend, when the price is trending above, buy when the MACD crosses above the signal line from below. In a downtrend (MACD should be below zero line), short sell when the MACD crosses beneath the signal line.
- You should plan an exit when the MACD drops back below the signal line.
- Exit when the MACD rallies back above the signal line.
- If going long at the outset of the trade, keep a stop-loss just below the most adjacent swing low. However, if going short, keep a stop-loss just beyond the most recent swing high.
Guppy Multiple Moving Average
The Guppy multiple moving average (GMMA) is formed of two different sets of exponential moving averages (EMAs). The first set has EMAs for the previous three, five, eight, ten, twelve and fifteen trading days. Daryl Guppy, the Australian trader who is the inventor of the GMMA, believes that first set highlights the sentiment and direction of short-term traders. A second set is formed of EMAs for the prior thirty, thirty five, forty, forty five, fifty and sixty days. However if you need to make an adjustment to compensate for the type of a specific currency pair, it is the long-term EMAs that are modified. This second set is believed to show longer-term activity of the investor.
However, if a short-term trend does not reflect any support from the longer-term averages, it could be a sign of the the tiring longer-term trend. In reference to the ribbon strategy e discussed above for a visual image. With the help of Guppy system, you could make the short-term moving averages shown with one color, and all the other longer-term moving averages with a different color. Have a look on the two sets for crossovers, like with the Ribbon. The trend could be changing it direction when shorter averages start to cross below or above the longer-term MAs.