All indicators have a distinguishing factor within them that makes them suitable for certain strategies. Some focus on the recent data price points. And some put more weight on the previous ones. While some include factors like momentum, volume, and long-term and short-term reflections.
The Stock Moving Average trading strategy is a technique used by traders where they modify the lengths or span of the MA to control its outcomes.
Common examples of these are the 7 and 21 day Moving Average. The 7 21 Moving Average is a short term technical indicator that reacts faster to price fluctuations. This is because its length is extremely short in comparison to the common periods of Moving Averages like the 50 and 200 day moving average thinkorswim.
The Below ThinkorSwim Chart shows a 15 minute timeframe on YM and the price action for 1 trading session. The xBrat Manager uses EMA Crosses as mentioned above as part of its logic in its Ribbon. The Ribbon changes from red to green and vice versa. So at Number 1 on the chart, those taking the long position remain in the trade until the Ribbon changes to red at Number 2. The traders taking the short would exit at Number 3 when the ribbon turns green. This is just part of the Logic for the xBrat Manager, Learn ore by watching the Training Video for this must have trading indicator HERE
In this article, we’ll talk more about the Stock Moving Average and guide you in selecting the best one for you.
How to Use Moving Averages for Stock Trading?
Using Moving Average for stocks is as easy as learning about the purpose of the Moving Average, finding its formula, collecting the needed information, and interpreting the result.
The Stock Moving Averages can help you identify potential buy and sell signals. But without proper knowledge of the kind you’re using, it may lead you to loss.
Knowing all of the Moving Averages suitable for your stocks is the first step. The next is to find out which of them fit well into your plans of investment. There is a Moving Average for every strategy, and the Simple Moving Average is the one suitable for all.
The formula for Moving Averages is easy to calculate and is solvable through calculators. And if you know your stock well enough, collecting the needed data points from them wouldn’t be a trouble.
All kinds of Moving Averages produce average prices for a specific investment. From these average prices, you may interpret the direction of your stock; whether that’s a downtrend (bearish) or an uptrend (bullish). And continuing the use of your Moving Average should also help reveal whether the stock is going through a continuation of the said trend or a reversal of it.
Simple Moving Averages VS Exponential Moving Averages
Let’s expand on the Simple Moving Averages that we mentioned earlier.
Its name is pretty self-explanatory. This Stock Moving Average has a simple operation and purpose and is the most basic of all Moving Averages. The simple average uses the arithmetic mean of a set of values over a specified period to produce continuation and reversal signals.
Now, the Exponential Moving Averages are slightly enhanced versions. These make use of the same data as Simple moving averages but handle them differently. They are more known to be weighted average calculations. That’s because they put more emphasis on recent prices. This makes it more responsive to fluctuations.
The main distinguishing feature of these two Moving Averages is their sensitivity to price fluctuations. The SMA provides equal weight to all price points while the EMA weighs more on the recent points. This is why the results of both averages over a single stock may differ.
They both smooth out price fluctuations and reveal or signal trends. And it is possible that they both produce the same outcome. Both the Simple Moving Average vs Exponential Moving Average are helpful indicators. But their usefulness relies on the needs of the investor and the current condition of the stock.
200-Day Moving Average Explained
Now, just like the exponential moving average vs simple moving average, the 200 day moving average strategy is also one of the most popular moving averages.
Before we move on to the 200 day moving average definition, it’s important to note that this is still a Simple Moving Average and not another kind of MA.
The 200-day SMA is a key indicator when it comes to determining overall long-term market trends and directions. This technical analysis tool is set on a span of 200 days. That being more than half a year makes its readings extremely accurate.
Just like the 20 moving average strategy, the 200-day SMA is one of the most common moving averages used by traders and market analysts. The lines this stock moving average produces on a stock’s candlestick chart will create divergences, convergences, slopes, steepness, and distance. And those are what indicate the trend, direction, and condition of the stock.
Best Moving Averages for Swing Trading
The Swing Trading technique is a process of attempting to generate small to medium-sized profits off of a stock within a span of days to weeks.
This technique is all about taking advantage of an anticipated price move. And traders usually anticipate that price moves with the use of technical analysis.
One of the widely used technical analyses for swing trading is the moving averages. This is because their periods and lengths are easily customizable depending on the trader’s needs. Just like the 21 day Exponential Moving Average and the 50 day Moving Average indicator. And if the trade isn’t of great length, there are also versions like the 4 hour Moving Average strategy.
Not to mention that they are easy to use and can be categorized into short, medium, and long term processes.
The best Moving Averages for swing trading would be the Simple Moving Average and the Exponential Moving Average. These two averages focus on the price movements of the stock without letting other factors like momentum and volume.
Not only do they have basic operations. But they are also excellent at revealing trends and their directions which is the backbone of swing trading.