Day trading with Average Method in Stock Market
Most new discoveries are suddenly seen things, that were always there -SUSANNE K LANGER
Nothing is new about the Moving Averages in stock market, but this simple technique make the difference.
A simple moving Average is simple mathematical manipulation of data that provides regularly updated or moving indication of market activity. The method for calculating a moving average (MA) is easy, take the closing price of 3 last closing, add them and divide them with 3 and you will get the average of 3 days. that’s your first MA point. On the fourth day you drop oldest day data and recalculate the average with the current daily price.This way your moving average will drop last day and add the new upcoming day and the price will be constantly moving with prices.
Technically, when the price of a market closes above the moving average, it is considered bullish. A market that has been in an up trend and then falls below the moving average line indicates a probable change in trend from bullish to bearish. Conversely, if the market has been moving above the MA, this is taken to be a bullish signal.
These all examples are with 3 days moving average. So, its easy to understand the system as you can have reverse your position very fast with 3 days moving average.
How Moving Averages Give Buy and Sell Signals on Price Charts.
- Buy – Prices closing above their moving average indicates a bull trend.
- Sell – Prices closing below their moving average indicates a bear trend.
If you have bought position with the market and prices are above moving average of 3 you have to hold the position and as the price change the trend down and price go below the below the moving average, you have to sell your stock and more over you can make short position and go short, till the market closing prices don’t come above the moving average.
Benefit using moving average as trading tool :
- Trading signals are specific and objective, they are not subject to interpretation.
- Moving average signals can keep you positioned in the markets at all times, MA will push you to long or go short.
- Moving averages are trend following systems, when ever market turn around for long direction you are with the market.
Risk using moving average as trading tool :
- Not do well in certain type of market, when market tend to move sideways and small trading range it gives numbers of false signals.
- MA system tend to give timing signals quite some time after a change in trend.
- MA system often give many signals , can cause a large amount in commission
- MA based systems tend to use large stop losses, have to accept large risks, not always so, but stop-loss is must.
Rules to follow :
- Buy or reverse your position from short to long when the trend changes to bullish from bearish, STOP LOSS is must.
- Sell or reverse your position from long to short when the trend changes to bearish from bullish, STOP LOSS is must.
- Trade at every reversal. When you close out one position, you have to make another one.
- Must follow all above three rules and have timely STOP LOSS.
- Chart for the Infosys Technology Ltd. for Three months. with 3 days MA
The market is on sideways since last four-months, but still 3 days moving script Infosys Technology Ltd. has directional move towards downside with signal to sell the stock. The blue line shows the closing price of a day and red line is 3 days moving average.
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