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