Which Moving Averages Should You Use on Your Chart?
stockcharts.com, for example, will automatically show 50-day and 200-day moving averages on it’s free charts.
But, are these the best moving averages to use? If so, why?
In her text, The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology, Anne-Marie Baiynd poses just those questions.
In her opinion, there is “no magic reason” for using a particular moving average and it is, to some extent, merely a preference. She says that we often see bounces off the typical moving averages – 10, 30, 50, 100, 200 – because so many people watch these averages and use those as trade points. And the more other people see trades at those points, the more they are likely to follow them.
According to Anne-Marie, “this perpetuation is the reason for recommending the use of ordinary [indicators] above esoteric ones”.
She goes on to say that one of the reasons she focuses on the 8 exponential moving average (which she uses as well as the 20 simple moving average and along with the 50 and 200 simple moving averages as general gauges) is because many automated trading systems use the 8 EMA.
With regard to when to use the moving averages, Anne-Marie suggests that if a swing trader or investor uses the 50 and 200 simple moving averages to trigger a trade, they might potentially miss out on profits. She thinks the longer averages are only useful to day traders using shorter term charts – 30 minutes, 15 minutes, 5 minutes and 1 minute.
Anne-Marie also uses Bollinger Bands, which define a range of prices around a moving average. When setting the Bollinger Bands for day trading, she suggests using the simple moving average setting of 25 with a standard deviation of 2.5. If swing trading or holding for longer than a day or two, then a simple moving average setting of 30 with a standard deviation of 2.5 is suggested.