Sunday, April 19, 2009

Moving Average CrossOvers - English

I received some comments from Varanasi - Mr Vijay who wrote his question using the Roman Script but in the Hindi Language. I have replied to him in Hindi, thanks to Blogger!
Here is the English translation of the question, and, my response.
Here is the comment - translated :
"You always say that everyone should have a trading strategy. I fully agree with you. Trading without a strategy is like catching birds in darkness.
I have a trading strategy based on Moving Average Crossovers. I take a 60 minute chart for the Nifty and plot 50 and 25 period crossovers on it. I trade based on the crossovers but sometimes I have to follow wide stop losses.
What should I add in my strategy that will reduce my stop loss. When the 25 period crossed the 50 period to give a buy signal, I went long around 2790, but if the market were to suddenly fall I may have to give up 150 to 200 points before I get a reversal signal.
Other than the crossover, I do not have any other way of taking profits. If I am long from 2790, then what should I follow to ensure hat my profits do ot wither away."

My reply, translated from Hindi:

Salutations to Vijay ji,

I am giving the reply to your question in Hindi. Often, prices move up rapidly so that the average lines remain far below. Then, suddenly prices start falling. But the averages take time to fall and cross each other. Often this leads to a wipeout of profits, and, sometimes, even a loss.

Now, we do not have prior knowledge of sudden decline in prices. If we knew about it, we could quickly cut our positions withut bothering about a crossover. Then, how do we protect ourselves ? You should keep in mind the fact that it takes time for the averages to cross each other and this slowness often gives an advantage. When there are small dips, our positions are not stopped out.

But, often when the market turns suddenly, we suffer monetary losses as well as psychological pressure. Therefore, we should have some way to protect ourselves.

First Method: Keep as top below the nearest pivot low. This stop should not be close by. If Pivot Low is nearby then search for a distant stop. It is possibl that a quick decline may stop you out and then the market resumes its advance. Theefore, decide beforehand, the level at which yu will reenter your position.

Second Method: If you see a big move in your favor then take partial profits. There can be many definitions of a 'big move'. One way is: multiply average true range by 3 or 4. If your profits are equal to this number, then onsider it a 'big move'.

7 comments:

sandeep said...

sudarshan ji, i am reading , anaylising, studying, impleminting( the ways ) your,s blogs from last five months . And today i declare u as a sole mentor of bad world of equity market where lot of people loose there capital, there family social security level , life yes sir life i mean it in process of making maoney in market. One thing i request u that kindly make notes on euophoria

Mind Without Fear said...

Sudarshanji,

could you please comment on another aspect of strategies that are based on moving average cross overs? I find that there are inevitable periods of whipsaws that eat away profits. Typically, after a big move, there are a series of false signals generated by the cross over system. What filter can be used to not trade these false signals? I mean I know there will be false signals, I just want to avoid some of them, avoiding all of them is not possible.

Will really appreciate your thoughts on this.

rani said...

average true range of how many periods sir?

stockchart said...

hello, sudarshan sir,nice and practical suggestion to vijay ji....would love to add my thoughts,,as vijay ji's system is using ma crossovers,, after entering a trade,he can use a shorter term ma band,,like 5,8,13 exponential mas, to ride the trend,as he used to with mas,he should be comfortable in using shorter period mas,eaisily.bjnaik@hotmail.com

gkr said...

Would you please suggest some technical analysis software, that I can use? Cost of software would not be a problem but it should be compatible with NSE.

Music Rasika said...

Dear Sudarshan ji,
I am posting for the second time at your blog,which I read with avid interest everyday.IT has helped me understand a lot about the mind of the trader.
I had posted about HDFC as a sell the last time around,and you took a lot of effort to explain the setup and concurred with me.I was very happy that I was looking at the right things.

I am back this time with another stock,bsed on my rudimentary observations-ONGC.
It looks that the stock has shown a reversal signal.

1.It has broken the uptrend line starting on March 31st.
2.Volume trend in place(high vols followed by backing off vols).
3.Key indicator-MACD crossover
4.RSI coming down from 70.

So,in essence,decreasing vols,MACD crossover downwards,volume trend in place-do these confirm ONGC as a sell?Some sense of a support at 745-750 levels leaves the risk-reward also favorable for consideration.
I request you to please reply to my post,it will give me a lot of encouragement.
Best regards,
Karthik

Music Rasika said...

Just to add to my previous post,can we classify April 16 and 17th as a Dark Cloud Cover setup(harami),which also slgnals bearishness?
The OI in futures segment has gone down,and prices are down-meaning profit booking(long unwinding).
Is this correct?
Best regards,
Karthik

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