20 Period Moving Average Strategy
A trader can choose a moving average to trade with based on the chart timeframe that they use for trading: a trader might choose the moving average to trade 1 minutes trading chart, 1 hour chart, 4 hour chart, day chart or even week chart.
A trader can also select to average the closing price, opening stock price or median stock price - when choosing a MA indicator.
Moving average indicator is oftenly used to measure strength of trends. The data of the moving average is precise and its output as a line can be customized to the preferences of a indices trader.
Using the moving average indicator is one of the basic strategies to generate buy and sell signals which are used to trade in direction of the market trend, since the moving average indicator is a lagging indicator & a trend following indicator. The Moving average trading indicator as a lagging trading indicator means that moving average MA will tend to give late signals as opposed to leading indicators. However, the Moving Averages indicator as a lagging indicator gives more accurate stock signals and is less prone to whipsaws compared to leading trading indicators.
Traders select the moving average period to use when trading with this moving average indicator depending on the type of trading style method they use: short term, medium term and long term.
- Short term trading: 20 Period Moving Average Strategy
- Medium term trading: 50 Period MA Strategy
- Long term trading: 100 Period Moving Average Strategy
The period of the MA in can be measured in 1 minute chart, 1 hour chart, 4 hour chart, day chart or even week chart. For our indices trading strategy example we will use 1 hour chart period.
Short term moving averages are sensitive to stock price action and can identify trend signals faster than the long term moving averages. Shorter term moving averages are also more prone to trading whipsaws compared to long term moving averages.
Long term moving averages help to avoid fake outs, but are slower in identifying new trends & reversals.
Because long-term moving averages calculate the price average using more stock price data points, the long term moving average does not reverse as fast as a short term moving average and it is slow to catch the changes or reversals in the trend. However the longer term moving average is better when the market trend stays in force for a longer time.
The task of a trader is to find a moving average period which will spot trends as early as possible while at the same time avoiding fake out signals -indices whipsaws. As a trader you will need to first test different moving average periods before deciding which moving average period is best suited for your trading style method based on the results of the testing that you will do using different moving averages.
MA Period Strategy
Moving average indicator is a market trend following indicator that is used by traders for three things:
- Spotting the beginning of a new trend
- Measure the sustainability of the new trend
- Identify the end of a trend & signal a market trend reversal
The moving average indicator is used to smooth out the volatility of stock price action. The moving average indicator is an overlay indicator and it is superimposed on the market price chart.
On the moving average example explained and illustrated below - the blue line represents a 20 period moving average, which acts to smooth out the volatility of the price action.
100 Period Moving Average Strategy - MA Period Strategy - MA Strategy
Calculation of the Moving Average Price Period
The moving average is calculated as an average of stock price using the most recent stock price data point -indices periods.
If a moving average uses the 20 period to calculate the moving average then it is referred to as a 20 period moving average, because most traders use the day chart as the standard stock price period we shall just refer to the moving average as the 20 day moving average.
To calculate the 20 day moving average the price of the last 20 days is averaged - and the average is then updated constantly after every new stock price period closes. So after each new stock price period close is formed the average is then re-calculated afresh using the most recent 20 price periods, that is why this indicator is called a moving average MA because the average is constantly moving when stock price data is updated and re-calculated.
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