BEST MOVING AVERAGE FOR DAY TRADING SERIES

This is because the most recent price input has a bigger impact when only a few periods are being averaged. It changes direction relatively quickly when the asset price changes direction. The shorter average tracks the price more closely. The chart above compares a shorter average (20) with a longer average (100). How Many Periods to Use in a Moving Average If it was a 1-minute chart, these would be 20- and 100-minute averages. Since the time frame of the chart is daily, these are 20- and 100-day averages. The following chart shows a 20-period and 100-period moving average applied to it. Moving averages often use closing prices for whatever time frame is being used (1-minute, hourly, daily, or weekly chart), but the open, high, low, or average of these periods could also be used to generate the data points needed for the moving average. These values are connected on a chart to form a continuous line like the examples below. If it was a 100-period moving average, we would need 100 closing prices before we could create the first average. Note how the simple moving average only uses the last 5 values, since this is a 5-period moving average. How a Moving Average is ConstructedĪ simple moving average is calculated by adding up the closing prices over a number of periods, and then dividing the total by the number of periods used.Ī period can be any time frame, such as 1-minute candles or daily candles/periods.Īssume a stock had the following closing prices and someone wanted to know the 5-period moving average: Closing Price

Popular moving averages types include simple (SMA), exponential (EMA), and weighted moving averages (WMA).Īverages over 10 periods, 20/21, 50, 100, and 200 periods tend to be popular choices among traders. This article looks at ways moving averages are used and their benefits and drawbacks.Ī moving average is plotted on the chart and shows the average price of the asset over a given period. Like any tool, it is how it is used that determines its usefulness. A trend filter in a higher time frame as well as a block filter could be added.Moving averages are a tool used by traders and investors for making trading decisions and analyzing price charts. The main benefit of this trading strategy based on moving averages is its simplicity. The strategy appears to prefer short time frames. As soon as the span parameter is increased to 20 or 30 periods, trade results worsen. The block filter rejects all signals which occur during a specified period of time, in this case outside the main trading hours.ĭifferent settings for the SMA did not yield better results. An improvement could be to add a block filter. The majority of the signals resulting in a losing trade occurred outside the main trading hours of the market. Of these 21 signals, 11 resulted in a profitable trade and 10 in a losing trade. A total of 21 trading signals were detected. To test, we ran this strategy over a random period of 14 days. Of course not every trade will run as smoothly as these two examples.

The position reaches its target about one hour later (red zone). When the SMA crosses back below the WMA at 10h20, a short sell position is opened (red arrow). The target is reached at 06h00 (green zone). A long position is bought at around 04h30 (green arrow). This example shows a long trade and a short sell trade. The profit target is a modest 20 pips which should be hit fairly quickly. We tested the strategy on the major forex pair EUR/USD using a 10-minute time frame. When the SMA crosses the WMA downwards it is considered a bearish event and the strategy opens a short sell position. When the SMA crosses the WMA upwards it is considered a bullish event and the strategy buys a long position. The WMA is set to 144 periods and the SMA to 5 periods. When calculating a WMA, the more recent the price the more relevant it is, thus the more weight it is given. When calculating a SMA, every traded price has the same weight. The strategy has a fixed target of 20 pips and a stop loss of 15 pips.Ī weighted moving average is a variation of the simple moving average.

A weighted moving average (WMA) serves as trend indicator and a simple moving average (SMA) serves as the trigger for trading signals. This strategy uses two different moving averages.

BEST MOVING AVERAGE FOR DAY TRADING SERIES

The final part of this series about day trading using moving averages shows a simple but an apparently effective day trading strategy for forex trading.

Best moving average for day trading