Moving Averages

[hagadol]

What are the usual lengths of a moving average you would add to a chart, if you were looking at the price in the following time periods:

1 day

1 week

3 months

I realise this is an individual choice, though assume there is some general school of thought on this.

 

[oatman]

That's a big question. Have a look here. I got this off a Google search. There's other info there as well.
http://www.investopedia.com/university/movingaverage/
If I'm using them I like Fibonacci numbers. I use 21 and 55 crossover. Also like to see where the 200 is.

 

[hagadol]

Thanks - The site gives a good explanation.

 

[Nildes]

I should think it would depend on what you propose to do with the information?
The smaller the sample size (lower the number of periods included) the less reliable the result in terms of trend but the more reflective in terms of recent movements.

I'm not sure that an MA is the most appropriate tool for a one day perspective and might suggest one MA of 5 periods would reflect the short term view, one of 10-20 the mid term view and one of 90 the longer.

The problem with specifying fixed periods is that they are not always appropriate for the share in question. If you are using the MA's as buy/sell signals, I suggest you need to do some back testing on the share of choice and find out how many false or marginal trade signals they generate.

In my limited experience, the one size fits all approach to MA's isn't as helpful as something you tweak to fit your style and the share in question.
Hope this helps

 

[hagadol]

I was looking at UK Pound / US Dollar price of period of 1 day and 1 week periods.

 

[hagadol]

I am also interested in the three months answer.........

 

[chump]

Not sure what you wish to do with emas,but here is something you might already know.

One of the biggest problems traders have is choosing indicators/system that works both in trending markets and sideways markets. Figuring which is which is not always blindingly obvious to begin with so it's useful to have some warning signs as to what sort of market might be ahead of you.

So put both a 100 and 50 day ema on your chart. For the moment don't fuss too much about the timeframe.

Nice daylight between them (be more specific and measure that with ATR if you wish) with the 100 under the 50 ema the market is trending up whatever 'wriggling' about you see going on with the price.

Reverse the order with the ema on top and the markets going down.

All pretty obvious.

However, when you see ever shrinking daylight between those indicators you have an advance warning to stand aside, or switch systems,because for at least awhile the trading range is going to get tighter than a ducks backside. That might only be for a day or two, or it might just go sideways for two months.

Some people would use a cross of these to maybe enter or exit the market. I prefer to use them to say I have not got a clue what will happen next other than there should be some narrowing of trading activity for an unknown period of time,hence stay out, or switch systems for that period. You could use an ATR filter which says when the value between 100 and 50 ema is below X * ATR I will not take new position and obviously the converse holds true.Alternatively, when ATR value hits a certain point you will only use system B which is for trading ranges.

If in doubt stick with a trending system and find a chart showing plenty of daylight between the 100/50 ema. Use other emas if you feel they show you a better picture.


Nothing blindingly great about this suggestion,but it's just another one for the toolbox to try to keep the probabilities with you.
Use it ,or chuck it.

Cheers

 

[kevin546]

All depends what your style of trading is and what information you require from them.

A low sma/ema will keep you closer to the price and a longer one further from the price.

You need to establish what they can offer you in a trending and non trending market and then make your selection on that basis.

There are different ways to use them. The most common is a crossover theory but beware all sma/ema's by there very nature lag the price.

Some will use the gap theory such as how far the price has moved from a specific MA before it has been overdone or an MA moving much closer to the price before it has to move away again.

On momentum deals you can apply a system where the price retraces against a trend and the price moves back towards a nice slopping MA where a value entry can be placed to re-join or enter the trend.

These are just a few simplistic styles and not a complete list.

 

[Nildes]

hagadol,
Maybe I've missed something that's obvious to you but I'm still not entirely sure what it is you want the Moving averages to tell you in each situation.
Looks like some of the others are puzzled too.
Maybe if you were to give a little more background on how you trade and what sort of signal you would like the MA's to give you?

 

[hagadol]

I am not trading yet, spending some months getting a good overview - Currently reading up on moving averages..............

So if I am trading FX Dollar and pound, I wanted some guide on what length moving averages to use in the following examples:

1 Day

1 Week

3 Months

On the assumption that the chart I am looking at is of that date range and my time in a trade is of simular time. Day meaning day trading.

What are the usual reasons that you would decide the length of the moving average ?

Everywhere I look it seems to exclude this definition !

 

[oatman]

If you want to use crossover for entries/exits then as someone already said, it's how many signals you want in a day. The shorter your 1st MA, the nearer the price it is and the more signals you'd get. Try some numbers out and see what different results you get.

 

[hagadol]

On what basis do you decide how many signals you want ?

My assumption is that the longer the moving average the less signals though they are likley to be more valid.

 

[oatman]

How many times per session/day do you want to trade. How long a time frame do you intend to run a position. I don't rely on MAs but still leave a 21/55 on a 1min running, on one set up, for interest. For me it helps to reinforce the picture. Holds my hand when I'm in a position. A chart is a picture of the market. What it's done before, is it likely to happen again? Indicators lag. If I'm idecisive or changing my mind on a trade, then the MA might help the picture.

 

[Thirteen]

may be a bit off subject, but try this-

get a chart open of your fave future, stock.

plot the following ma's:
3,5,9,12,15,20,30,40,50.

delete the price series

appart from looking really cool, its way out the way the ma's all turn at the same time at major turning points

may be this tells when major reversals come - when the ma's come together?

 

[Nildes]

If I understand you right, I think you need to look at questions of sensitivity.
Find a chart package that allows you to set your own MA periods.
Select the currency or whatever that you want to trade.
Select the trigger signal; eg price crosses MA or MA crosses price or MA long crosses MA short.
Run it over say three months and see how many buy and sell signals it generates.
Subtract the costs of your trades etc from the margin you've made and ask yourself if you traded proftably over the period.
Change the MA's to reduce or increase the number of signals and apply the same test.
When you get to an optimum between number of trades and profit generated, that's the optimised MA.
Back test it again over longer timeframes and see if it still works.
Obviously, this is very simplified but I think its the direction you want to take.
Hope this helps. :?:

 

[oatman]

13 and Nildes, I agree, this is really what I mean.
You've got to look at a chart and see how your contract behaves.
Then play with the MAs and see how they treat you.

 

[madasafish]

well I have some very simple MAs which work very well in any timescale.

3,9, 20 and 50 all emas

If price is below 50 and 50 is falling: downtrend
If price is below 50 and rises to meet it and 50 is still down: bounce in downtrend
If price has a second bounce to 50 and is above 50, maybe a urning point.

Reverse for above 50

And Uptrends are when Close>9 ema and 9 ema is rising and above 50 vice versa for downtrends.

3 ema helps view consolidations versus change of direction.

Do I use this? Look at Jarvis daily versus 50 ema.. a classic.. or Mayflower...

 

[TWI]

A lot of the FX desks look at the 21day MA and it seems to be the standard on most of the Commodity desks too as far as I have seen.
IMHO
Whatever you use do not rely on it as anything other than a visual indicator. If you trade MA x-over or Px/MA cross you will not make money but get whipped around a lot. You need to use them only as one part of your system, if at all.

 

[Nildes]

Hagadol, I think the message from me is: there are lots of numbers you could use and lots of ways you can use them.........but there's no magic one size fits all combination that serves equally well in every circumstance.

You're going to have to put some work into it to find out what suits best.
Check out some of the number combinations suggested here, they might not be ideal, but if they work for others, it'd be a good place to start from. :cheesy:

 

[oatman]

MAs I used to see a lot were 4/9/18 and 5/10/20. Combinations of Fib numbers are also popular. I like 21/55. 100 and 200 are popular for longer term.
Experiment.