What is MOVING AVERAGE trading strategy, how to use moving average CROSSOVER strategy correctly?
hello friends welcome to option panel youtube channel if you remember previously i talked about what is technical analysis and what are the key things you need to know when you are looking at uh technical analysis if you remember there are a few things i mentioned one was price volume and then when you're studying price and volume you have to look at you know for the prices to continue to be in a trend or break down the trend then the second thing was about looking at uh whether the prices are or the stocks or that underlying thing is overbought oversold and some other things so this particular video tutorial i'm going to focus on the first and the very uh important aspect of technical analysis and that is determining the trend how can you figure out trend now there are hundreds and hundreds of indicators all right but what i'm going to share with you is the simplest and the most popular way of determining the trend and now it may come across some of you who may already know about the market you may think oh well i've heard about this thing a lot of time well you might have heard about this a lot of time but did you use it to make money and if you haven't really used it for making money then i would suggest that look at this tutorial with a fresh perspective and see what is it that you might probably be missing when you were applying this indicator and if you are completely new let me tell you this you know people will tell you it's simple it doesn't work in all sort of nonsense just tell them shut up let me study this first and let me see whether or not it's gonna make me money so let's get deep dive into it understand how basically you use moving averages to determine the trend whether the trend will continue or the trend is going down or what could be your entry point or exit point using that trend i want to talk to you about moving averages i will share with you what is the best way to use those moving averages how do you build the right kind of moving averages which will give you an amazing result so now once you look at it you'll find that you have one candle second third four fifth six seven eight nine ten and so on now each of these things will have four prices the four prices can be uh if you look at it high low open and close now as we are moving from one day to another day you can create an average price okay now this average price is an interesting one because what you're doing is you are trying to smoothen this price moving for that particular day and create an average to find out how the prices are so some people may use only the highs of the day some people can use low of the day some people can use only the opening and some use close price or depending upon what variation you choose in fact you can also choose high plus low plus open plus close divided by four to give you the average price of that day okay in most of the cases if you go around and if you see you know people using the moving averages into their charts most of the time it is a closing price then now you may choose whether you want a three-day average you want a five-day average you want eight-day average or you want 10-day average or you want bigger and that's what really is that you see people explaining to you you know that i'm using simple moving average for so and so date so three days is naturally showing you it's a very fast moving average showing you the average of the last three bars similarly if you're using 10 then it is showing you the average of the last 10 bars right and the most popular i'm going to talk about that as well in a minute are 20 50 and 200 and i'll come to that in a minute as well but you know while you're using averages there are actually multiple types of averages so what do what do you mean by multiple types of averages you can take you know a simple average or a simple moving average or you can use exponential moving average or you can use weighted moving average or you can choose hull moving average there are many many types of averages which are available and the two most popular averages are simple moving average and exponential moving average so which one should you choose and which one you should not choose and what are the key differences between simple moving average and exponential moving average the simple moving average is really you know just the simple average of those 10 days while exponential moving average gives weightage to the more current market movements okay so if you want to just normalize it over 10 days period 28 speed years using a simple then you call it simple moving average but in case of 21 days for example you want to give more weightage to the recent price action then you use exponential moving average now when you're looking at the moving averages ideally speaking you should have three different types of settings short-term moving average and then you should have a medium-term moving average and then you can also have a long-term moving average now why would you have these three uh different types of moving averages short-term medium-term and long-term short-term so that you know you can see what has been happening in the price action especially in that shorter period of time long term maybe really very very long and by the time you make a decision it might be very late so which is why you may not want to choose just one long term option so what are the advantages of a short term versus the longer term shorter term helps you to take quick action and longer terms can help you refine your major entries particularly so i use long-term averages especially for bigger long-term oversold kind of opportunities where i can benefit from a rapid market move so when you look at these three types of moving averages short term median term and long term the most popular simple moving average for short term is 20 some people also use 21 moving average for medium term many people use 50-day moving average now some people like to go for medium time as 100-day moving average they think that 50 is also too quick but in my opinion you can use 100-day moving average but make sure that you also use 50 because 50 is used by millions of traders all around the world and for long-term average people are using or most of the traders use 200-day moving average so these are three different settings that most people are using one fantastic usage of moving averages is to use the moving averages as your stop-loss criteria too so in case if you've been in a trend and you've been following it and you see the market just keep going up and up and up and you've been fortunate to get a lot of money out of that particular trade you may say okay i'm going to use 20 or 21 day sma as my moving average meaning if the price drops and closes below 21 moving average i'll say i'm out of that long trade similarly you can choose 200 or 50. typically when i follow i'd rather go for 2021 i don't really look for 200-day moving average as my stop-loss criteria and the reason for that is simply because by the time it hits 200-day moving average it's pretty late okay short-term i use for most for the stopping out and the long term i usually define and refine for my entries sometimes many people also use or the traders also use like this maybe your short-term moving average let's just use another one another color this may be your medium-term moving average and then there may be like you know sorry this may be short time this may be medium term and this may be more of a long term so let's call it short term medium term and long term so some people also define i mean this is also a great usage of the moving averages is that you can choose these areas as an area for entry you know where you see all the conversions happening and once you know it's crossing through this you may define and use it as your entry points too so i'm gonna share with you how it looks like when you are looking at a real chart what you're seeing on my screen now is think or swim if you look at it here and if i zoom in you will see that there are prices right so this is for spy spy is the s p 500 etf and here you will notice that there are actually four prices right so look at this bar that i'm pointing out here in the red bar and look at this box this box will show you open high low and the closing price the high price for that day was 472.87 and the low price was 464.8 how can we use moving averages to make some trading decision so let's say if i use spy and i go to studies and i look for simple moving average and let's say i add three simple moving averages short term long term and medium time so short time as i mentioned that most people are using 20 day moving average and for medium term all or most traders use 50 day moving average and for our longer term most of the trader worldwide tend to use 200-day moving average so i applied these moving average and you will see well i've got three different lines here correct now the very first observation you will have from this chart is that every time spy drops around this blue line which is 50-day moving average it tends to bounce so let's count this here it has dropped to 50-day moving average one time here second time here third fourth fifth sixth seventh eighth and then ninth and then ten almost ten times it is dropped to that and if you would have just made one simple trade strategy that is you will go along once that underlying stop drops to 50-day moving average and you decide maybe 100-day moving average a 200-day moving average as your stop-loss you will notice that out of 10 times actually you will lose only on one time nine out of ten trades would have been profitable now that's a pretty significant result for uh you know a not like a rocket science based strategy a very very simple strategy on s p 500 just on 50 day moving average if you would have decided to go in out of 10 trades nine trades would have been profitable just by following that so you've got short term medium term and long term moving average but is that it can we just simply use it or can we also modify it so what i'm going to show you the best way to use a moving average okay so let's go ahead and for example let's say i'm going to use microsoft and that's where i will show you how we can use this on microsoft so how do you figure out whether or not should you be using here is one very important thing that you need to understand when you're trading moving average each stock exhibit its own character meaning that the 20 50 200 you can't take it just just as given for every single stock remember each stock behaves quite differently and if you are into that particular stock it's it's worth the effort to figure out what sort of settings are best suited for that particular stock okay so let's look at let's do this for microsoft i'm going to remove all these uh from here and i'm just going to do here let's just go ahead and edit studies i'm removing all of those and let's begin this trial with 20-day moving average now if you see this you will say that actually it does not really behave according to 20-day moving average right you will notice that between this period and let's highlight this period to this period is when actually the 21 day moving average has been working for just about three to three months so that might have been good time but can we can we play around and see which moving average actually works better so let's go ahead and edit studies and maybe then uh let's go ahead at this studies edit studies and i will change this settings to maybe let's say 25 let's just say 25 and we look at it and we say does it follow 25 moving average let's say hey it doesn't really follow even 25 moving average except for this period when the stock was really trending let's see another one let's just maybe make it 30 days moving average and then see if it follows 30-day moving average apply and okay so we see the 30-day moving average well not really it's it doesn't follow you in 30-day moving average it may or may not be a good example of using moving averages except for this four five year four five months period uh let's change this again and uh maybe let's make it say 50 day moving or 40 just one by one as we go through 40 day moving average and when we come here we look at 40-day moving average it doesn't seem to follow 40-day moving average as well right so let's go ahead and change this and make it 50-day moving average and keep looking at it and then see whether it works on 50-day moving average now we're getting closer to some sort of uh exhibit that microsoft tends to follow so 50-day moving average we have some but we still have some room that it actually tends to dip below that level as well so let's go ahead at the studies maybe change this to say 70 day moving average so we click 70 day moving average and then we see now uh it's trying to make more sense if you look at here 70 day moving average it fits perfectly here 70 day perfect perfect here there is there are some room for error and again 70-day moving average so what i've just done and what i've demonstrated to you is that don't just take it you know um as given if you are being given or somebody is telling you that okay go ahead with 50-day and 200-day moving average use this knowledge to see what sort of patterns this follow because stocks tend to move in a cycle as well so see what sort of cycle it is following and if you happen to see a microsoft every time it drops to around 70 day moving average it does it does tend to move okay except unless there were a little bit of period with a little bit of bearishness so you may say that okay 70 day moving average is what probably i will use for my entry now let's use another moving average to define what possibly could be a stop loss so i go in studies edit studies and i will just duplicate it here to find out if i can get another simple moving average that i can use as a stop loss so now this stop loss what do you think should be bigger uh setting bigger than 70 or lower than 70 should be bigger than 70 right so let's just go ahead and say 90 days for example so if i click on 90 days i will just change this color 90 days edit studies and i change this color so i can see different now you will notice that actually it does go to 70 days but then pulls back to about 90 days and then it comes in so maybe i can't remember 90 i will just change this 200 day moving average edit studies and i make it 100 and i say hey okay you know i can use 100-day moving average as either my entry point or my stop-loss point most of the time it is not really dropping so i could have used 70 days an entry point and really benefit but between 1700 not so much of the gaps are there i could have also chosen 100 but if i would have chosen 100 i probably will not get the entries here right you see that 70 days i would have gotten the entry and i could have possibly used 100 day moving average as my stop loss and i will be writing if i would have taken this entry here at 70 at 242 i will be actually riding even all the way now without being stopped out you know emotions really become the difficult issue when you are trading the stocks but having a mechanical system can can allow you to profit from the markets and stay in the market for longer duration now let's see does this setting work for let's say um let's choose another one example shopify shopee or sec limited now if you see set um se it just doesn't follow any either the 70 day or 90 to 100 days meaning that you just simply can't use that setting for um for c limited so let's play around and see what sort of settings will work for s e so i change this edit studies and i begin with 21st 20 days so when i click on 20 days i see that it actually does not follow even 20 day simple moving average as well so let me also try and play around and see if it follows actually 20 exponential moving average yeah i can use that as well versus simple moving average just go in and remove this or rather i can have both and then see which one it is following better so let's say simple moving average and i will also add exponential moving average okay moving average exponential and i will change both to 20 to show you the difference as well on what is happening between these two okay so change this to 20 and let's make this purple color we do it okay apply and then all right so it doesn't follow 20 day either simple moving average or exponential moving average as well so this is not really working here so what averages it might follow so edit studies let me remove both uh 20 exponential and i'll just keep one only and then let me change this to say 35 just y 35 randomly just to see what settings are working and i see that 35 well it tends to not really work even on 35 so shopee shopee or c limited may not really be a good stock let's just do one more try again first 50 let's see on 50 day moving average click ok and then apply well it seems like 50 day moving average might be working or last one year 50 day moving average and 100 day is not really providing any support area so let's change this to 100 to 150 if i change this from 100 to 150 and now i notice that on shoppi or c limited you will notice that it looks like 150 days might be working on on c limited and about 50 day moving average for entry possible entry on um on c limited so let's just change this also again make it 60 to see whether 60 qualifies for entry and 60 does look like now other thing when you are doing this test and you're looking at back testing to see what kind of moving average settings work for that particular stock it is also a good idea to expand your time horizon so that's another way another secret that you should be looking at to see whether or not it follows that game now if you look at it here choppy on seems to follow even over a two year period two years period okay it really did not break that level until recently and when it dropped it actually dropped very very hard afterwards and in fact on this red line on around you know 60 days or 70 days probably will be also uh really nice so i can also change this again like let's say make it 75 here so uh for longer run we had 150 and for shorter run we had 75 and it seems like 75 might be working so what i'm trying to tell you here is through this uh strategy and understanding this part is that you have multiple averages that you can use for your trading okay if simple moving average exponential moving average hull moving average and the weighted moving average and then each moving average has multiple settings you should do the individual stock research and see what kind of settings it follows what kind of cycles it follows and if you do that your rewards can be amazing so this is how you look at moving averages and you uh you know develop an investing approach now you can study it more and don't think that you know just by studying this 30 minutes video tutorial or short tutorial become an expert on moving average and you will become a millionaire tomorrow now this is a right foundation for you to learn well that's some some serious sound okay well this is this will help you to set up your uh your basis right and if you studied well and if you study as i showed you in the tutorial and figure out you know the short term medium term and long term averages for your stocks and define the crossovers for it you know you can really take it to the next level so don't jump into some conclusions it's the right time to really understand and see what will make a difference in terms of determining the trends for your portfolios okay or for your stocks you can use it to refine your entry you can also use it to refine your stop loss and so much more now in the next tutorial i'm going to talk about you know how do you know whether this is stock or this trend is coming to an end especially either on the bullish side of the downside how do you know whether it is already overbought or is oversold how can you combine the multiple just so much you know this is really getting exciting now here's the thing you know preparing all these videos is a lot of work and as you would appreciate that there's a lot of time and thinking that goes behind this so if you are enjoying this and if you want to appreciate you know just book the like icon and send us some love this will help us to send this video other people can find it out as well and um that's it you know just just hit that like like icon on the video i appreciate that thank you now here is your homework for uh for today from this tutorial and this is an extensive one so you can't have a shortcut so this video is choose the three stocks top three stocks in your stock holding it may be from your local market or maybe from the u.s market it does not really matter so choose the three stocks if you don't have the
stocks in your portfolio choose the three stocks that you would like and then find out short term medium term and the long term uh trends parameters for that stock and make that comment below so i would know it you have actually done some studied and you have you have really reviewed stocks in your portfolio and you've done and you played around some settings i will also leave you know a link to the websites where you can go and play around with the moving averages and it's all free you don't need to buy anything and spend some time studied well and then see did you find something you know that can make a difference and it just happened to be a lot a lot of lightning and things which are going on with the place where i'm sitting but i thought you know you have a weekend or whatever time you have it you can watch this and prepare a good good study plan so with all that this is your coach panoch i look forward to seeing you the next tutorial make sure you do the homework and let me know in the comment section your top three stocks and for those stocks your short term medium term and long term moving averages and once again stay safe stay healthy this is manoj i look forward to seeing you soon you
2022-02-01 18:59
