As a type of moving average indicator, its goal is to calculate the price over a certain period. In turn, this will give you an idea of the asset’s performance. It will be easier to implement your next move when your decision has a solid basis.
If you’re familiar with how moving averages work, then it will be easier to understand the fundamentals of the 20-period moving average strategy. It’s almost the same as a 10-day, 50-, day, or 200-day moving strategy. The main difference is the period it covers.
Read on and find out more about the 20-day moving average strategy. We’ll look at its definition and computation, as well as other things you must know.
What Is the 20-Day Moving Average?
The 20-day moving average calculates an asset’s average price in the last 20 trading days. It’s one of the many technical analysis tools that can help day traders make well-informed decisions.
Using the 20 day moving average trading strategy can be effective in evaluating short-term trends. When the price goes above the 20-day moving average, there is likely an uptrend. Meanwhile, a downtrend is evident when the price goes below.
As it’s common in different moving averages, the 20-day computation aids in leveling price data over a predetermined duration. In turn, you’ll get an average price that constantly updates.
Now, you might be wondering why people use 20 days and not 10, 50, 200, or whatever duration. Well, at the end of the day, it all boils down to personal preference. Nonetheless, some traders like the 20 moving average strategy because 20 days are not too short or too long.
How Does the 20-Day Moving Average Work?
As we’ll talk about in the last part of this post, the 20 day moving average strategy works by computing the average over the last 20 days. Once you are done, it will show as a dot on the chart. One chart covers 20 days.
Meanwhile, on Day 21, you’ll need to re-calculate the value of the moving average. Add the value of the last 20 days, which means that you’ll have to leave out Day 1 in your previous computation. Instead, you’ll begin with Day 2 and add until Day 21, and divide by 20.
The new computation will then show up as another dot in the chart. This will repeat at the start of every new trading day. As multiple dots show up in the chart, you can connect them and make a line, which will determine what the trend means.
During a market uptrend, you can see the 20-day moving average as the support or floor. Therefore, the price will bounce up.
In contrast, when there is a downtrend, consider the 20-day moving average the ceiling or resistance. Hence, the price will drop.
20 Day Moving Average Strategy
As the name implies, this strategy entails the need to look at the average price within the last 20 days. One of the trading strategies to use is known as the crossover. Among others, one of the most popular types of the latter is a price crossover.
With the crossover, you have to look at whether the price crosses higher or lower the moving average. In turn, it can signal a potential trend change.
For instance, let’s assume that the 20 day moving average crosses 200 day moving average. As earlier mentioned, this can signal an uptrend when the cross is above. On the hand, if it does not cross above, then it can show a downtrend.
In addition, you can also use the 20 day moving average strategy to decide whether you’ll buy or sell. If the shorter moving average is above the longer moving average, then it might be a good time to buy. However, if it’s the other way around, then it can be a sell signal as it’s a sign of a weakening market.
How To Use the 20 Day Moving Average For Your Benefit
To make the most of the 20 simple moving average strategy, you’ll need to know how you can interpret the meanings. In turn, you must apply them in your trades. And if you’re lucky, you might end up being profitable.
One of the most important is to fully understand the concept. Know the meaning of the patterns, such as when the price crosses below or above another moving average. This is one thing we talked about above, which should help you determine your next move.
Another thing that you might want to do is to adjust the timeframe. For instance, you can also use the 20 day moving average strategy in shorter timeframes, such as one hour. This will be beneficial in identifying shorter-term movements for a better understanding of the market.
Lastly, you must know that false signals are possible. The 20 day moving average strategy isn’t free of loopholes, and such can hurt your trade. To prevent this, it would be best if you can use other technical indicators to confirm your assumptions.
On the chart below we have our EMA Cloud set to 20day, which used as confirmation of our xBrat Algo BUY and SELL Signals. So we would only enter the trades when thre price action is bove the 20 Day EMA Cloud for longs and vice versa for shorts. Then importantly use the 20 Day EMA cloud for trade management. For example when the long trade from the 4*, 5* and 6* BUY signals, breaks the EMA cloud to the downside, we take out profits.
Calculating the 20 Day Moving Average
The computation is straightforward. As it is an average, all that you need to do is add the prices in the last 20 days and divide it by 20. The answer will be the moving average for that period.
For illustration, let’s say that the prices for Stock ABC from Days 1 to 20 are the following: $1, $2, $3, $4, $5, $6, $7, $8, $9, $10, $11, $12, $13, $14, $15, $16, $17, $18, $19, and $20.
To get the moving average, get the sum of the prices in the last 20 days ($210). Once you have the sum, divide it by 20, which is the number of days. You’ll get $10.50, which shows the average price of Stock ABC in the last 20 days.