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How Moving Average as a tool can help you to get Profit?

There are multiple technical indicators present to support complex theories and calculations. But, if you want to go to the basics, then one of the simplest indicators used in technical analysis that forms the backbone of several trading strategies is Moving Averages.

What are Simple Moving Averages?

A moving average is a mathematic to assess data points by calculating a series of averages of varying subsets of the full data collected. In all, it is actually a subset of closing prices.

To fully understand a moving average, you should find out how big the subset is. You must have heard people talking about the 50-day moving average or the 200-day moving average. They are the most used ones.

So, a 50-day and 200-day moving average are calculated from the closing prices of the last 50 and 200 days.

However, subsets larger may be less sensitive to daily price changes. It is because subsets get bigger, and every single day will show a minor effect on the mean. So, you will notice that in a bigger set mean doesn’t get affected by a single result.

How can you profit from Moving Average?

The easiest tactic involving moving averages is the MA-crossover.

  • If the prices surpass above the MA, say bottom-up from 50-MA, you should purchase.
  • If the price surpasses the 50- day MA from top-down, you should sell.

In simple terms, if the price is above the MA, it will continue to rise, and if the price is below the MA, the price may fall.

All in all, it is not a fully profitable tactic but a strategy that every trader should be aware of.

The next tactic is the mean revision strategy.

As you know, MA is the mean of a subset of closing prices in a stipulated time. You should sell if the price rises a specific percentage above the MA, as it may revert to the mean. As the Moving Average is the mean of prices over a suggested time period,  if the price is above the MA to some extent, it is expected to return to the average.

Similarly, if the price is somewhere below the MA, you can expect it to revert to the mean and rise in some time; hence, you can make your purchase at this point.

Again, this may not be a profitable strategy but a worth-knowing tactic.

                                                      How successful stock traders spend his time?

The third tactic is the dual-moving average crossover.

If you have 2 MA on your chart, the 50-MA and the 200-MA, you can use both to make profits.

If the 50- moving average is above the 200-moving average, it is an uptrend. However, if the 50-moving average is below the 200-moving average, it is the downtrend.

These three strategies are easy to execute and often used in trading software. Though they aren’t helpful out-of-the-box, you can streamline the parameters and get good returns from extensive experimentation.  However, Simple Moving Averages may be affected by bigger changes in price, and this is where Exponential Moving Averages come to the rescue.

They showcase price changes more closely than SMA. However, you should know how to use it. While EMAs can help you identify trends sooner, they also make you enter a trend before it’s confirmed. Hence, make sure you use both SMA and EMA together to avoid fakeout and easy or late entry.

In all, moving averages is an amazing tool to have in your trading arsenal. They are best helpful to confirm market conditions and offer an indication of long-term trends.

 

 

 

 


27-12-2021
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