The Right Average

May 31st, 2013
in contributors, syndication

Online Trading Academy Article of the Week

by Brandon Wendell, Online Trading Academy

Moving averages are a part of many traders’ analysis tools. A question I usually get from students is,

What period moving average is best to use?”

While there is no one moving average that is perfect and will work all the time, there is a way to identify the best average for the security and time frame that we are trading.


Follow up:

All securities have cycles that affect the price movement. If we can identify the cycle that is dominating our stock, we can identify with a higher probability when tops and bottoms in price will occur and when we should buy or sell our stock. Cycles are measured from trough to trough. The troughs are the low points in price that correspond with the lows in the cycle.  While this sounds complicated, with practice it can become easier.

Click to enlarge

Looking at the weekly chart of the Nifty, we can see that the stock index seems to make bottoms at a fairly regular interval.

Click to enlarge

When we are using moving averages, we acknowledge that it is an average of price and that price will move away from that average and revert back during a trend. The average should be much like the black line dissecting the cycle I drew in figure 1 of this article. We want an average that is half the length of the cycle so that it will show our peaks and troughs as movements from and to the average itself.

In an uptrend, we should see prices move away from the average only to snap back to them when the trough of the cycle occurs. If we are changing to a downtrend, then the average would be violated and the price would bounce off of it to the downside before returning during peaks in the cycle. If the average is being violated in both directions, then we do not have a strong trend in that timeframe.

Click to enlarge

Click to enlarge

By using the right average for the timeframe you are trading, you can increase your odds for success. Just be careful to check the cycle from time to time as cycles can change with market conditions. We need to adapt with the markets for maximum success. We can use this cycle identification on any security and on any timeframe. Until next time, trade safe and trade well!

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved