Simple moving average trading
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Moving Average (MA)
Build your trading muscle with no added pressure of the market. Before you dive into the content, check out this video on moving average crossover strategies. The video is a great precursor to the advanced topics detailed in this article. So, what is the simple moving average? Once you begin to peel back the onion, the simple moving average is anything but simple. I think we all recognize the simple moving average is a popular technical indicator. Forget technical analysis, we all were likely using moving averages in our grade school math class.
If you do a quick Google search, you will likely find dozens of day trading strategies , but how do we know which one will work?
Well, in this post, I am going to show you everything you need to know about simple moving averages to identify the system that will work best for your trading style.
I will inform you through various channels, including trade examples, charts, and videos. Also, I will cover a host of topics; to name a few, the simple moving average formula, popular moving averages 5, 10, , real-life examples, crossover strategies, and my personal experience with the indicator.
Calculating the simple moving average is not something for technical analysis of securities. This formula is also a key tenet to engineering and mathematical studies.
This detailed article from Wikipedia [1] delves into formulas for the simple moving average, cumulative moving average, weighted moving average, and exponential moving average. The last five closing prices for Microsoft are:. Quite simply to calculate the simple moving average formula, you divide the total of the closing prices by the number of periods. Every indicator is based on math, but the SMA is not some proprietary calculation with trademark requirements.
If you think you will come up with some weird 46 SMA to beat the market -- let me stop you now. It is critical to use the most common SMAs as these are the ones many traders will be using daily. The shorter the SMA, the more signals you will receive when trading. Most investors will look for a cross above or below this average to represent if the stock is in a bullish or bearish trend.
The simple moving average is probably the most basic form of technical analysis. Even hardcore fundamental guys will have a thing or two to say about the indicator. Below is a play-by-play for using a moving average on an intraday chart.
In the below example, we will cover staying on the right side of the trend after placing a long trade. Notice how the stock had a breakout on the open and closed near the high of the candlestick. A breakout trader would use this as an opportunity to jump on the train and place their stop below the low of the opening candle. At this point, you can use the moving average to gauge the strength of the current trend created during the opening range.
In this chart example, we are using the period simple moving average. Far too many traders have tried to use the simple moving average to predict the exact sell and buy points on a chart.
A trader might be able to pull this off using multiple averages for triggers, but one average alone will not be enough. Before we go any further, save yourself the time and headache and use the averages to determine the strength of the move. Now take another look at the chart pattern. Do you see how the stock is starting to rollover as the average is beginning to flatten out?
A breakout trader would want to stay away from this type of activity. Now again, if you were to sell on the cross down through the average, this may work some of the time, but in the long run, you will end up losing money after you factor in commissions. Why would you lose money? Well in the majority of cases, a break of the simple moving average just leads to choppy trading activity.
Remember, if trading were that easy, everyone would be making money hand over fist. I like to call this the holy grail setup. This is the setup you will see in books and seminars. Simply buy on the breakout and sell when the stock crosses down beneath the price action. Look at how the price chart stays cleanly above the period simple moving average. The brain is a funny thing. I remember seeing a chart like this when I first started in trading and then I would buy the setup that matched the morning activity.
I would look for the same type of volume and price action, only to later be smacked in the face by reality when my play did not trend as well. This is the true challenge with trading, what works well on one chart, will not work well on another. Remember, the SMA worked well in this example, but you cannot build a money-making system off one play.
But remember this: another validation a trader can use when going counter to the primary trend is a close under or over the simple moving average. After the gap, the stock trended up strongly. You must be careful with countertrade setups. If you are on the wrong side of the trade, you and others with the same position will be the fuel for the next leg up.
Whenever you go short, and the stock does little to recover and the volatility dries up, you are in a good spot. But what about moving average crossovers as a trigger for entering and closing trades? First, the moving average by itself is a lagging indicator, now you layer in the idea that you have to wait for a lagging indicator to cross another lagging indicator is just too much delay for me.
If you look around the web, one of the most popular simple moving averages to use with a crossover strategy are the 50 and day. When the simple moving average crosses above the simple moving average , it generates a golden cross. Conversely, when the simple moving average crosses beneath the simple moving average, it creates a death cross. I only mention this, so you are aware of the setup, which may be applicable for long-term investing.
Since Tradingsim focuses on day trading , let me at least run through some basic crossover strategies. The first thing to know is you want to select two moving averages that are somehow related to one another. For example, 10 is half of Or the 50 and are the most popular moving averages for longer-term investors.
The second thing is coming to understand the trigger for trading with moving average crossovers. A buy or sell signal is triggered once the smaller moving average crosses above or below, the larger moving average. Clif referred to using two moving averages on a chart as double series moving average. No more panic, no more doubts.
The period SMA is the red line, and the blue is the period. Now in both examples, you will notice how the stock conveniently went in the desired direction with very little friction. Well, this is the furthest thing from reality. If you look at moving average crossovers on any symbol, you will notice more false and sideways signals than high return ones. This is because most of the time stocks on the surface move in a random pattern. Remember people; it is the job of the big money players to fake you out at every turn to separate you from your money.
This again is why I do not recommend the crossover strategy as a true means of making money day trading the markets. If you have been looking at cryptocurrencies over the last six months, you are more than aware of the violent price swings.
So, it got me thinking. Are there any indicators that can give a trader an edge, or is bitcoin so volatile that in the end, everyone loses at some point if you try to actively trade the contract? For this study, I am using the golden cross and death cross strategies, which consists of the period and period simple moving averages. For those of you not familiar with these strategies, the goal is to buy when the period crosses above the period and sell when it crosses below.
To make things more interesting, the study will cover the minute time frame so that we can get more signals. As you can imagine, there are a ton of buy and sell points on the chart. Now, to be clear, I am not a fan for always staying in the market, because you can get crushed during long periods of low volatility.
The first trade was a short at 10,, which we later covered for a loss at 11, Herein lies the problem with crossover strategies. If the market is choppy, you will bleed out slowly over time. I ask this question before we analyze the massive short trade from 10, down to 8, A challenging part of trading is you must trade every time your edge presents itself. Sounds easy right? That move down is beautiful, and you would have reaped a huge reward, but what is not reflected on this chart are there some whipsaw trades that occurred before the 26th of January.
Do you think you have what it takes to make every trade regardless of how many losers you have just encountered? Oh, how I love the game! The other telling fact is that on the second position you would have exited the trade 2, points off the bottom. Herein lies the second challenge of trading with lagging indicators on a volatile issue. The next move up is one that makes every year-old kid believe they have a future in day trading -- simply fire and forget.
After this sell signal, bitcoin had several trade signals leading into March 29th, which are illustrated in the below chart. If you go through weeks of trading results like this, it becomes difficult to execute your trading approach flawlessly, because you feel beaten down. Much to my surprise, a simple moving average allows bitcoin to go through its wild price swings, while still allowing you the ability to stay in your winning position.
The below infographic visualizes the details of this case study. Now that you have all the basics let me walk you through my experience day trading with simple moving averages.
Simple moving averages (SMA) take the arithmetic mean of a given set of prices The length of the moving average to use depends on the trading objectives. See how to enter and exit trades with the simple moving average. This guide contains how-to videos and real-life chart examples of winning strategies.
A simple moving average SMA is the simplest type of moving average in forex analysis. If you plotted a 5 period simple moving average on a 1-hour chart, you would add up the closing prices for the last 5 hours, and then divide that number by 5. You have the average closing price over the last five hours!
A simple moving average SMA calculates the average of a selected range of prices, usually closing prices, by the number of periods in that range.
The moving average MA is a simple technical analysis tool that smooths out price data by creating a constantly updated average price. There are advantages to using a moving average in your trading, as well as options on what type of moving average to use. Moving average strategies are also popular and can be tailored to any time frame, suiting both long-term investors and short-term traders.
How to Use a Moving Average to Buy Stocks
Moving average is a trend-following, or lagging , indicator because it is based on past prices. The most common applications of moving averages are:. While moving averages are useful enough on their own, they also form the basis for other technical indicators such as the moving average convergence divergence MACD. The two basic and commonly used moving averages are the simple moving average SMA , which is the arithmetic average of a security over a defined number of time periods, and the exponential moving average EMA , which gives greater weight to more recent prices. The simplest form of a moving average, appropriately known as a simple moving average SMA , is calculated by taking the arithmetic mean of a given set of values.
Simple Moving Average (SMA)
Build your trading muscle with no added pressure of the market. Before you dive into the content, check out this video on moving average crossover strategies. The video is a great precursor to the advanced topics detailed in this article. So, what is the simple moving average? Once you begin to peel back the onion, the simple moving average is anything but simple. I think we all recognize the simple moving average is a popular technical indicator. Forget technical analysis, we all were likely using moving averages in our grade school math class. If you do a quick Google search, you will likely find dozens of day trading strategies , but how do we know which one will work? Well, in this post, I am going to show you everything you need to know about simple moving averages to identify the system that will work best for your trading style.
