Saturday, March 5, 2011

Trading with Moving Averages

Moving averages are one of the most popular and easy to use tools available to the technical analyst. They smooth a data series and make it easier to spot trends, something that is especially helpful in volatile markets. They also form the building blocks for many other technical indicators and overlays.
Moving averages smooth out a data series and make it easier to identify the direction of the trend. Because past price data is used to form moving averages, they are considered lagging, or trend following, indicators. Moving averages will not predict a change in trend, but rather follow behind the current trend. Therefore, they are best suited for trend identification and trend following purposes, not for prediction.
Don't expect to get out at the top and in at the bottom using moving averages. As with most tools of technical analysis, moving averages should not be used on their own, but in conjunction with other tools that complement them. Using moving averages to confirm other indicators and analysis can greatly enhance technical analysis.

Primary Trend
On a daily chart, apply a simple moving average with 200 days as the period. The 200 day MA gives a rough idea of the primary trend. A bull market exists when the closing price is above the 200 day average. A bear market exists when the closing price is below the 200 day average.

Intermediate Trend
On a daily chart, apply a simple moving average with 50 days as the period. The 50 day MA gives a rough idea of the intermediate trend. The intermediate trend is up when the closing price is above the 50 day average. The intermediate trend is down when the closing price is below the 50 day average.

11 comments:

Balu said...

Sir
You are great.. On a trading holiday saturday early morning at 7.40 you posted this... shows you are 24/7 market man... so much dedication at this super mature stage of your career. Very inspiring.
Thank u very much for this great service you are offering for trading world..

Balaji Singh B
Khammam

mas said...

Sir - show us how to make buy / sell trades using a suitable moving average for short term trades? what indicators / oscillators to be used alongside ? is 20 SMA most suitable for short term trades ?

Tejash said...

Sudarshanji,I am Tejas Mehta from Ahmedabad ( today we met at Ahmedabad ET NOW & IIFL BUDGET CONFERENCE - 5TH MARCH )

Tejash said...

Agreed with you sir that moving averages do show trends however i would like to say that it does not clearly indicate the price line of the script. If i have to predict how much price will increase or decrease then it is not possible with that. Moving average is just about finding normal trend and as you said it can show intermediate trend . We need to check few more parameters

alphabet1 said...

This MA talk is available all over the net.Death/Golden cross is now just too common a concept.
From you we expect an expert indepth novel concept.

men said...

What is the signifinance of the 20 ema then if 50 gives the intermediate trend?
Also when one is taking a positional call which values do you suggest?
Finally when stocks are way below the 200 dma then which other average should one use as some jump from daily ma to weekly ma?

men said...

You are bearish on ITC inspite of it being >5,20,200 dma with very good volumes? Could you please explain why as it defeats the above logic of trading with ma?
Assuming that your above call is right then when should one buy a stock when it is >200 dma, also some stocks flirt with the 200 dma for very short periods and go up/down then how to avoid getting whipsawed here? Thanks,

Business Minds said...

Dear Sir/Friends

Over the years, I have seen ppl discussing different trading techniques & methods.

I have seen ppl talking about how to minimize or control losses.

But I have yet to find a web site or people who can give a surefire foolproof method to enable me earn my living from stk mkt.

Now I feel that no such trader actually exists who really earns his/her daily bread through trading in stk mkt with his/her own money.

My own study through various angles suggests me that discussing different trading techniques or having bundles of technical knowledge or even fundamental knowledge like balance sheet reading skills has nothing to do with earning "bread for family" from stk mkt.

I feel that earning "actual profits" from stk mkt and that too through trading will always remain more a dream for a retail trader.

I am keenly searching for a person who can honestly say that he earned "actual take home profits" from the stk mkt.

I request seniors to kindly put their views with clarity on above matter to educate me & others as well.

Regards

men said...

I buy ONLY index counters on declines, sooner or later they go above my purchase rate, yes profits are small but it is better than a small loss also. This method will FAIL MISERABLY IN MIDCAPS, so take this method with a pinch of salt.
Use pivot points to get levels if comfortable else wait for ur rate to come. Regarding taking profit from the market it is possible only after spending 5 years on finding a method that suits each person, it takes the same time to become an Engineer or a Doctor.
Warren Buffet said " NO matter how serene today may be, tomorrow is always uncertain". Sobers told Brian Lara "Your next innings always starts with a 0 after he hit >500 runs in one innings" ditto in the stock market pure copying another will not always make money. Enjoy!!!!!!!!!

Mausam said...

Dear Sudarshan Sir,
i have become a big fan of u. i am a new trader and learning a lot from u on etnow.
could you please let me know, i have 130 shares of Sterlite technology at the rate of 99/-.
what should i do of all these. is there any near future of this. or should i book a loss and quit from this.
my second question is - i have banking shares of around 10000/-. should i keep them for some more time to sell or should i sell them.
Thanks.

ilan kaalai said...

one basic question sir,
what are primary, intermediate, immediate trends? how long one trend is taking to change counter side? what are the importance of these trends , how to use them for investment and for trading?

thank you sir