Saturday, January 23, 2010
Moving averages help technical traders track the trends of stocks by smoothing out the day-to-day price fluctuations, or noise.By identifying trends, moving averages allow traders to make those trends work in their favor and increase the number of winning trades.
Every type of moving average is a mathematical result that is calculated by averaging a number of past data points. Once determined, the resulting average is then plotted onto a chart in order to allow traders to look at smoothed data rather than focusing on the day-to-day price fluctuations that are inherent in all financial markets.
The simplest form of a moving average, appropriately known as a simple moving average (SMA), is calculated by taking the arithmetic mean of a given set of values. For example, to calculate a basic 10-day moving average you would add up the closing prices from the past 10 days and then divide the result by 10.
These curving lines are common on the charts of technical traders, but how they are used can vary drastically. It is possible to add more than one moving average to any chart by adjusting the number of time periods used in the calculation. These curving lines may seem distracting or confusing at first, but you'll grow accustomed to them as time goes on.
The simple moving average is extremely popular among traders, but like all technical indicators, it does have its critics. Many individuals argue that the usefulness of the SMA is limited because each point in the data series is weighted the same, regardless of where it occurs in the sequence. Critics argue that the most recent data is more significant than the older data and should have a greater influence on the final result. In response to this criticism, traders started to give more weight to recent data, which has since led to the invention of various types of new averages, the most popular of which is the -
Exponential moving average (EMA):
The exponential moving average is a type of moving average that gives more weight to recent prices in an attempt to make it more responsive to new information. This type of moving average reacts faster to recent price changes than a simple moving average. The 12- and 26-day EMAs are the most popular short-term averages, and they are used to create indicators like the moving average convergence divergence (MACD). In general, the 50- and 200-day EMAs are used as signals of long-term trends. EMA responds more quickly to the changing prices. EMA has a higher value when the price is rising, and falls faster than the SMA when the price is declining. This responsiveness is the main reason why many traders prefer to use the EMA over the SMA. Below Tech.table will vouch for the efficiency of EMA (Note the change in colours alerting instantly).
Moving averages are a totally customizable indicator, which means that the user can freely choose whatever time frame they want when creating the average. The most common time periods used in moving averages are 5,10, 20, 30, 50, 100 and 200 days. Alternatively, fibonacci believers use 3, 5, 8, 13, 21, 34, 55, 89, 144, 233 days. The shorter the time span used to create the average, the more sensitive it will be to price changes. The longer the time span, the less sensitive, or more smoothed out, the average will be. There is no "right" time frame to use when setting up your moving averages. The best way to figure out which one works best for you is to experiment with a number of different time periods until you find one that fits your strategy.
Primary functions of a moving average are to identify trends and reversals, measure the strength of an stock's momentum and determine potential areas where an asset will find support or resistance.
Identifying trends is one of the key functions of moving averages, which are used by most traders who seek to "make the trend their friend". Moving averages are lagging indicators, which means that they do not predict new trends, but confirm trends once they have been established. This "lag" is somewhat mitigated by the arrival of EMA.
A stock is deemed to be in an uptrend when the price is above a moving average and the average is sloping upward. Conversely, a trader will use a price below a downward sloping average to confirm a downtrend. Many traders will only consider holding a long position in a stock when the price is trading above a moving average. This simple rule can help ensure that the trend works in the traders' favor.
To measure momentum, pay close attention to the time periods used in creating the average, as each time period can provide valuable insight into different types of momentum. In general, short-term momentum can be gauged by looking at moving averages that focus on time periods of 20 days or less(5,10,20).
Looking at moving averages that are created with a period of 20 to 100 days (25,50,100) is generally regarded as a good measure of medium-term momentum.
Finally, any moving average that uses 100 days or more (100,200) in the calculation can be used as a measure of long-term momentum.
One of the best methods to determine the strength and direction of a stock's momentum is to place three moving averages onto a chart and then pay close attention to how they stack up in relation to one another. The three moving averages that are generally used have varying time frames in an attempt to represent short-term, medium-term and long-term price movements. Strong upward momentum is seen when shorter-term averages are located above longer-term averages and the two averages are diverging. Conversely, when the shorter-term averages are located below the longer-term averages, the momentum is in the downward direction.
Another common use of moving averages is in determining potential price supports. It does not take much experience in dealing with moving averages to notice that the falling price of an asset will often stop and reverse direction at the same level as an important average. Many traders will anticipate a bounce off of major moving averages and will use other technical indicators as confirmation of the expected move.
Once the price of a stock falls below an influential level of support, it is not uncommon to see the average act as a strong barrier that prevents investors from pushing the price back above that average. As you can see from the chart below, this resistance is often used by traders as a sign to take profits or to close out any existing long positions.
Many short sellers will use these averages as entry points because the price often bounces off the resistance and continues its move lower. If you are an investor who is holding a long position in a stock that is trading below major moving averages, it may be in your best interest to watch these levels closely because they can greatly affect the value of your investments.
The support and resistance characteristics of moving averages make them a great tool for managing risk. The ability of moving averages to identify strategic places to set stop-loss orders allows traders to cut off losing positions before they can grow any larger. Using moving averages to set stop-loss orders is key to any successful trading strategy.
Data Used in Calculation:
Most moving averages take the closing prices of a given asset and factor them into the calculation. It is my experience that it would be important to note that this does not always need to be the case. It is possible to calculate an "EMA"by using the close, high, low . When plotted on a chart or put in a "Tech.Table", these impact your analysis as well as your trading results in a very big way.
Finding an Appropriate Time Period:
Because most MAs represent the average of all the applicable daily prices, it should be noted that the time frame does not always need to be in days. Moving averages can also be calculated using minutes, hours, weeks, months, quarters, years etc. Why would a day trader care about how a 50-day moving average will affect the price over the upcoming weeks? On the other hand, a day trader would want to pay attention to a 5-Hour or 35 Hour average/ Ema to get an idea of the trading ranges. I have found the 5-hour High & Low Emas to be quite effective during intraday trading and 5 Day High & Low ema for positional trades.
Responsiveness to Price Action:
Traders who use moving averages in their trading will quickly admit that there is a battle between trying to make a moving average responsive to changes in trend while not allowing it to be so sensitive that it causes a trader to prematurely enter or exit a position.
Short-term moving averages can be useful in identifying changing trends before a large move occurs, but the downside is that this technique can also lead to being whipsawed in and out of a position because these averages respond very quickly to changing prices. It is highly recommended to look at other technical indicators such as Macd, Stochastics for confirmation of any move predicted by a moving average.
Beware of the Lag:
Because moving averages are a lagging indicator, transaction signals will always occur after the price has moved enough in one direction to cause the moving average to respond. EW STudy mitigates this "Lag". This again emphasises the point that no method should be used isolatedly to have consistent success in the markets. If you want to use only one method, then wait for the perfect set up and do your trades, though if the trades are a few but the success will be high.
A crossover is the most basic type of signal and is favored among many traders because it removes all emotion. The most basic type of crossover is when the price of a stock moves from one side of a moving average and closes on the other. Price crossovers are used by traders to identify shifts in momentum and can be used as a basic entry or exit strategy. As you can see in the first chart, a cross below a moving average can signal the beginning of a downtrend and would likely be used by traders as a signal to close out any existing long positions. Conversely, a close above a moving average from below may suggest the beginning of a new uptrend.
The second type of crossover occurs when a short-term average crosses through a long-term average. This signal is used by traders to identify that momentum is shifting in one direction and that a strong move is likely approaching. A buy signal is generated when the short-term average crosses above the long-term average, while a sell signal is triggered by a short-term average crossing below a long-term average.
Moving Average Envelope:
Another strategy that incorporates the use of moving averages is known as an envelope. This strategy involves plotting two bands around a moving average, staggered by a specific percentage rate. Traders will watch these bands to see if they act as strong areas of support or resistance.
MA has also been used in the development of other indicators such as -
Moving Average Convergence Divergence (MACD)
One of the most popular technical indicators, the moving average convergence divergence (MACD) is used by traders to monitor the relationship between two moving averages. It is generally calculated by subtracting a 26-day exponential moving average from a 12-day EMA. When the MACD has a positive value, the short-term average is located above the long-term average. As mentioned earlier, this stacking order of the averages is an indication of upward momentum. A negative value occurs when the short-term average is below the long-term average - a sign that the current momentum is in the downward direction. Many traders will also watch for a move above or below the zero line because this signals the position where the two averages are equal (crossover strategy applies here). A move above zero would be used as a buy sign, while a cross below zero can be used as a sell signal.
A Bollinger band technical indicator looks similar to the moving average envelope, but differs in how the outer bands are created. The bands of this indicator are generally placed two standard deviations away from a simple moving average. In general, a move toward the upper band can often suggest that the asset is becoming overbought, while a move close to the lower band can suggest the asset is becoming oversold. Since standard deviation is used as a statistical measure of volatility, this indicator adjusts itself to market conditions. The tightening of the bands is often used by traders as an early indication that overall volatility may be about to increase and that a trader may want to wait for a sharp price move.
Speed Kills, so usage of moving averages which smooths out the noise & Choppiness is your best bet to navigate your trading/ investments in this financial race field..Moving averages can be effective tools to identify and confirm trend, identify support and resistance levels, and develop trading systems. As with most tools of technical analysis, moving averages should not be used on their own(But tell that to my critic who uses just moving average chart to make perfect entry points), but in conjunction with other tools that complement them. Using moving averages to confirm other indicators and analysis can greatly enhance technical analysis.
This, more or less, covers all Technical analysis that are sufficient to make consistent money in the market - namely Trendlines, moving averages, Trend Analysis, macd, stochastics and the Tech.Table.
And that is "Getting Rich Slowly".
Her father, a chef, took her to the kitchen. He filled three pots with water and placed each on a high fire. Soon the pots came to a boil. In one he placed carrots, in the second he placed eggs, and the last he placed ground coffee beans. He let them sit and boil, without saying a word.
The daughter sucked her teeth and impatiently waited, wondering what he was doing. In about twenty minutes he turned off the burners. He fished the carrots out and placed them in a bowl. He pulled the eggs out and placed them a bowl. Then he ladled the coffee out and placed it in a bowl. Turning to her he asked. "What do you see?"
"Carrots, eggs, and coffee," she replied. He brought her closer and asked her to feel the carrots. She did and noted that they were soft. He then asked her to take an egg and break it. After pulling off the shell, she observed the hard-boiled egg.
Finally, he asked her to sip the coffee. She smiled as she tasted its rich aroma.
She said, "What's the point?"
He explained that each of the items had faced the same adversity - boiling water - but each reacted differently.
The carrot went in strong and hard. But after being subjected to the boiling water, it softened and became weak.
The egg had been fragile. Its thin outer shell had protected its liquid interior. But after sitting through the boiling water, its inside became hardened.
The ground coffee beans were unique, however. After they were in the boiling water, they had changed the water.
"Which are you?" he asked his daughter. "When adversity knocks on your door, how do you respond? Do you become weak, like a carrot, hard on the inside, like an egg, or do you change the circumstances, like the coffee beans?"
When the hours are the darkest and trials are their greatest do you elevate to another level?
It all boils down to how we react to it..!!
Friday, January 22, 2010
Thursday, January 21, 2010
We salute "Laxsmi Rajagopal" for that "Patience" shown in the past many days and to those silently "Holding their Sell positions".
You are right only when you make money..
Below this there are supports @ 5160-5150-5140.
Weekly ema is @ 5190. If bullishness need to return, it is in this zone of 5190-5145.
Manage your positions accordingly...If you had a plan of part booking @ 5180, do it.
Just state in simple words your plan for the day..i.e- The reading of last day & week, the expected move for the day, etc..This excercise should prepare you well for the day.
Wednesday, January 20, 2010
From yeaterday's low of 5219, "a" wave completed @ 5256, "b" completed @ 5232, now to the "c" towards 5256 to 5260/5265 and then the next fall..
Tuesday, January 19, 2010
Monday, January 18, 2010
in such a range with terminal implications
but without a valid "sell" trigger.
Ending diagonals take a wedge shape within two converging lines, with each subwave subdividing into a "three".
" A rising ending diagonal", as is the case here with Nifty, is usually followed by a sharp decline retracing atleast back to the level from which it began and typically much further.
It appears to be in the middle path of "d" or "4th" wave of that diagonal. If resisted @ 5290-5310, it is expected to move down towards 5160 and then make the last upmove to end this pattern. Alternatively, if the "d/4" is already done, it may continue to move up to 5320++ and end it. Remember., this is a pattern in the making and market can behave differently and when it does so, we will take note and act accordingly.
You can see the ORB buy initiated @ 5253 @ 9.45AM.
"Short @ 5242 reversed to Long @ 5258, S&R @ 5250-5255.
(If the earlier S&R @ 5225 was kept, the long remains..!!)
Book Profits on this long closer to 5295-5310 or Trail it.
Sunday, January 17, 2010
Waves that move the market in the direction of its main trend either up or down are called Impulse waves.
1. Impulsive waves are made up of 5 waves which themselves are made up of 5 waves. This is called the fractal nature of waves. This fractal nature of waves can be carried down to the smallest time frames. You may hear that we are in W5 of W5 of W5 of daily W5. Fractals within fractals within fractals ... This is important to a trader when he/she is trying to catch the end of a move while waiting for all patterns to be complete. Trading a reversal as it is completing its final wave into a strong resistance or support, is a very high probability trade.
2. Within a 5 wave pattern, Waves 1, 3, & 5 are themselves impulsive.
Below is an illustration of impulsive waves that move the market in its trending direction.
3. Within this 5 wave impulsive pattern depicted above, Waves 2 and 4 are corrective. We will cover corrective waves later. These corrective waves can be either simple or complex and one finds the lower the timeframe, the more complex these corrections become. Simple corrections are 3 waves (ABC or Zig Zag) and complex corrections are combinations of 3 and 5 wave structures.
4. In a 5 wave impulsive pattern, one of the impulsive waves (W1, 3, or 5) will generally extend and be longer than the other two. In the case of ES, Wave 3 is usually the extended wave. (Commodities, it is often Wave 5).
5. Truncation: Sometimes when the market is weak, we see a different reaction from Wave 5. We see a failed W5. A hint that W5 might fail is a 5 wave pattern that is completing below the level of W3. When we see a W5 failure (truncation), we can expect a deeper than normal correction.
6.An ending diagonal is a special type of wave that occurs in the 5th wave position when the preceding 3rd wave has gone "too far too fast". Ending diagonals can also be seen, sometimes, in the c wave of an "ABC". In all cases they are found at the termination of larger patterns suggesting exhaustion of the trend. Ending diagonals take a wedge shape with a sub waves of 3-3-3-3-3. A rising diaganl is bearish followed by a sharp decline and a falling diagonal id followed by an upward thrust. EW study helped to identify the "ending diagonal" possibility when Nifty made its low @ 2539 in Mar.09. Wave Personality: First waves are part of basing formations and "sell on rise" continues, though breadth and volumes tend to rise with prices retrecing the previous decline in shorter time. Second waves retraces much of the first wave convincing the bears that the downtrend is still on and the sell on rise has yielded good results and is followed with declining volumes. Third waves are strong and broad and the trend is unmistakable. They generative highest volumes and tend to be extended with many gaps in them. Fourth waves are predictable in both depth and form because of alternation as well as their tendency to terminate near the 4th of the previous time cycle and also a small break of the trendline.Lagging stocks build their tops. Fifth waves can be explosive and quite sharp if third wave has extended as it did in 2007-2008. And if 3rd wave was quite powerful, 5th can be an ending diagonal as it happened during the decline in year 2008-2009(A wave down).
The following is a summary of points that help to project price targets based on wave relationships:
The best approach is "Whatever Elliott rule will not allow, you can deduce that whatever remains is the proper perspective, no matter how improbable it may seem".
Wave Principle trains the trader/ investor to discern what the market is likely to do next before it does it. Wave principle limits the possibilities and then orders the relative probabilities of possible future market paths.
When you have conquered the essential task of applying a method expertly, you have done little more than gather the tools for the job. When you act on that method, you encounter the real work: Battling your own emotions. Thus it makes it clear that "Analysis" and "Making money" are two different skills and there is no way to understand that battle off the field....Only speculating in the real markets can prepare you for "Speculation in Markets". And you must do it yourself. Choose the wave principle..It will start you thinking properly and that is a first step on the path to trading successfully.
Get Rich Slowly.