How Do You Select a Stock Indices Moving Average to Trade With?
A trader can choose a moving average based on the chart time frame that he is trading; the trader might choose to use this Moving Average indicator on the minute charts, hourly charts, day trading charts or even weekly trading charts.
The trader can also select to average the closing price, opening price or median price.
Moving average indicator is a commonly used indicator to measure strength of Stock Index trends. The data is precise and its output as a moving line can be customized to a Stock Indices trader's preferences.
Using the moving average is one of the basic ways to generate buy & sell signals which are used to trade in the direction of the market trend, since the Moving Average indicator is a lagging indicator & a trend following indicator - this means that it will tend to give late Stock Indices entry signals as opposed to leading Stock Index indicators. However, as a lagging Stock Index indicator it gives more accurate signals and is less prone to whipsaws compared to leading Stock Index indicators.
Indices Traders choose the moving average period to use depending on the type of Stock Index they do: short-term trading, medium-term trading and long-term trading.
- Short-term trading: 10 -50 MA Period
- Medium-term trading: 50 - MA 100 Period
- Long-term trading: 100 - Moving Average 200 Period
The price period in this case can be measured in minute charts, hourly trading charts, day trading charts or even weekly trading charts. For our example we will use 1 hour chart time frame period.
Short term moving averages are sensitive to price action and can spot trends signals faster than the long term moving averages. Shorter term moving averages are also more prone to whipsaws compared to long term moving averages and a trader should choose a Stock Indices price period that will generate a Stock Indices signal early but not give too many trading whipsaws.
Long term moving averages help avoid Stock Indices whipsaws, but are slower in spotting new Stock Index trends and trend reversals.
Because long term moving averages calculate average using more price data, it does not reverse as fast as a short term moving average and it's slow to catch the changes in the trend. However, longer term moving average is better when the trend stays in force for a longer time but might also give late signals.
The work of a trader is to find a moving average period that will identify trends as early as possible while at the same time avoiding fake-out signals (Stock Index whipsaws).
