Best Indicators for Trading. Moving averages
From my point of view, apart from Price and volume, Moving Averages are one of the best tools for technical analysis that we may find out there.
Although I do not use them, sometimes I have a look at them.
Nowadays I just use the price and nothing else.
I like to read the tape.
Moving Average used in Technical Analysis
It is one of the most used indicators in the financial markets.
Many professionals use it as an additional tool because it is quite useful to clarify the long-term perspective of any market.
These averages are quite easy to be calculated. We just need to determine the average price for a number of previous days: we can choose a 20 days average or a 500 one.
Moving averages will not help you with your day trading. Though the best thing you can do is forget about day trading and concentrate on longer term trades.
In a daily chart the best is to use a big average like a 150 days one.
Normally, the assets move in such a way that one of the best options to see the great bull and bear swings is through the moving averages.
If we use small averages, for example 20, there will be a lot of confusion. The average is going to be too close to the price, and we would get too many buying and selling signals, most of them false of course.
The interesting thing about moving averages is to look for the big ones like 150 or 200 days, so we will be less confused and there will be much better trades.
Moving Average correction
A very big bull market of stocks or any other asset may last a long time. It may last six months or 3 years without being interrupted by 20% corrections. Moving averages is very useful to detect when one of those big swings is coming to an end.
As a general rule, an asset will be in a bull market if the price of the moving average is below the price, and it will be in a bear market if it is above the price.
When the price touches the average, it may mean that the bull or bear market have come to an end and that a new and opposite bull or bear market will commence.
The number of false signals is quite big, but nothing compared with those of a small moving average (like 20 days). But if we are wrong we will get out soon and try the next time again.
The win-loss ratio is usually so good that it is worth having a look at this indicator.
For instance, The Nasdaq gave us a fantastic example in 2008 and 2009 (and almost any stock as well). There was the huge bear market of 2008 and one of the best indicators to show us that it was coming was the moving average of 150 days (100 and 200 ones are still valid).
In 2007, there were some false signals about the end of the bull market. We would have lost some trades being short there. But the key is to bet small when we are wrong, for instance, 1 or 2% each time, with a 1 or 2% stop loss.
Moving Average Bear Market
Finally, the market broke down in 2008 and depending on our target we could have made a killing. A target of a 30% fall would have been nice, but a 20% one could be as well if we are more “conservative”. Or 40 if we think it is going to be a huge bear market (as it was).
The best part is that usually after a bear market, a bull market starts (or a big reversal) and moving averages are a very good indicator to tell us when it starts.
In this case, early 2009 the price crossed the moving average again and signaled a bull market. This time, and depending on your stop loss there was one false signal or none, and you could have ridden a nice bull swing for a 20, 30, 40 or whatever target.
That is a simple example, but it is quite common in the markets. There are always stocks giving good buy and sell signals. Because despite the fact that there has been a huge bull market last year, there have been a lot of stocks that have endured tremendous bear markets.
Think about gold stocks or Apple and Baidu in 2012, or Linkedin in 2013.
The opportunities in the bear and the long side are countless following this strategy.
This Indicator works very well to signal the end of a bull market of any asset, so it is not a bad idea to have a look to it sometimes.
In a way, it works similarly to the Dow Theory, One of its major advantages is to get us out when a bear market has started. Or even better, to be short and take a good profit riding the bear.