Technical analysis is as subjective as it can get. In history, so many developments have been made in this field by people with various backgrounds such as accountants, economists, engineers etc. Be it an indicator or even the price action theories like Dow, Eliot Wave Principles. All of them are proven methods and have their own pros and cons. But in my opinion, if there’s one thing that stands true among all of them, and is being used by almost all market participants at some point in the decision-making process, and my favorite is none other than MOVING AVERAGES (MA).
In this blog, I’m not going to share any strategy or how to use moving averages. Rather I will share some interesting insights on the behavior of moving averages which will definitely help you in your trading decisions. Before that let’s have brief information about what MAs are?
Moving averages are nothing but a line drawn on charts which is an average of given data for a certain period of time. It is adjustable as you can change the period as per your need. That’s all you need to know about what they are.
In the past, many people have come up with their own version of moving averages such as Hull, Triangular, Double Exponential, Triple Exponential, Welles Wilder, etc. They may have been useful for some, but couldn’t able to attract a wide range of users. Two types that are used commonly are the Simple Moving Average (SMA) and Exponential Moving Average (EMA). SMA is drawn by the data at face value where EMA is calculated using an exponential method that’s why it is faster than SMA. Some use SMA, some use EMA. I especially prefer using EMAs, as they give indications in advance compare to that of SMA. I’ll show you with the example below…
In the above example, notice the highlighted part. Reliance was in uptrend. In trending market, 20 moving average acts as support/resistance. But here you can see price had closed below 20 SMA for 6 consecutive days making the users of it believe the change in trend, but at the same time it took support at 20 EMA. This shows the superiority of EMA over SMA and that is enough for me to choose it over SMA.
Why 20, 50 & 200?
You can see that many pro traders use some moving averages in their system. And I can bet you that 20 & 200 is one of them always. 50 period does not get used as much as 20 & 200. But still, it is of great significance for traders.
If you open a chart & apply 20 & 200 EMA on it, you’ll see that almost all the time they have worked wonderfully. They never fail to impress at how well the price respect them at any point. It’s not a magic of any kind. They tend to fail some time as well. But the amount of time they work in your favor is far much bigger than the failed attempts.
I’ll tell you the reason why they work so well. It’s because, just like us, majority of traders (even institutions) use them as well. When price hit’s 20 EMA in uptrend, buyers jump in & lift it from there onwards. I call it the ‘KISS & BOUNCE’. And that’s what make them work almost every time. Just like that 200 EMA works in the event of bigger moves.
There’s one more reason why I love 20 EMA more than any other indicator. It acts as a magnet to the price. Price can not stay away from 20 moving averages for long time. At some point it will snap back at it. The entries taken as near as 20 moving average has proved to be better than those were taken away from it.
It can be used in any time frame and still it works like a charm.
Above chart is of NAUKARI. Time frame is 5 min. On 5th Jan. 21 it broke it’s all time high & went 14% up intraday. Observe the first highlighted part. At first price broke the first 5 min high but couldn’t able to move much. It moved when it kissed & bounced from 20 EMA. That’s where buyers came stock rocketed throughout the day. Then again, when next day, some profit booking came initially but that also didn’t go below 20 EMA. It took the support on it & went up again.
These are few but important insights I have shared about moving averages. If you used it carefully, it can create magics in your trading journey. I used the word ‘carefully’ because I don’t want you guys to take it for granted. Because it’s a trader who make money for him and not the indicator. So be patient. Study & observe it then use it.
Until the next one… peace!!