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Technical Analysis Moving Average for the Indian Investor / Trader

Trading Lesson >> Technical Analysis Moving Average for the Indian Investor / Trader

Trading Lesson will carry a series of articles, tips, trading strategies and advice to help the Indian investor or trader get a better insight to trading and investing in stocks, futures and options.

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Technical Analysis Moving Average for the Indian Investor / Trader

If you use technical analysis for making trading decisions, you're most likely looking for a system or a set of indicators that will help you make profitable trading decisions. Everyone does, and the process of searching can be a lengthy and tiring one. The number of software applications available today, coupled with the numerous indicators from which to choose, are mind boggling to say the least. Once you have an application, you then have to pick which indicator or indicators to use as well as the parameters. The parameters, or time frames, that can be applied to many of the indicators are infinite.

Lets consider the simple RSI, would you use 14 or 5 or 21 or maybe even a 7 period as a guide for your trades? Can any of these parameters be adjusted not to give sell signals in a Bull market or just give the buy signals that will work? Not that I've seen. This is just one indicator and only four different setting choices, each of which may or may not give similar signals simultaneously. In fact they actually could be conflicting each other depending on the current strength of the trend and market environment. Now how about if you choose to add Stockastic, ROC, MACD, or ADX with their different possible settings, this is no easy task.

So what should you do? The books available that provide convincing explanations of how to use one or a combination of these indicators are numerous. You may know a trader that uses one of these indicators and does well. If you choose to learn about indicators, the information from that trader, if he or she will share it with you will be of greater benefit than the book. They will have learned the nuances of the indicator through many hours of research to understand it and developed the ability to avoid most of the false signals that can occur.

If you were to remove everything from your charts, except what would enable you to place a trade, you would be left with the price bars. These price bars are what every indicator you will ever look at is based on and where your focus should be, not on the indicators.

A line on a price chart is actually meaningless. What I will show you is that a simple moving average can guide you to where you should be looking - prior price areas. These prior price areas are where traders have committed their money to an index or stock in the past, and money is what moves the market. A prior area of price support or demand is what can reverse a downtrend, not an oversold indicator. Price resistance or supply overhead is what causes prices to decline or consolidate, not an overbought indicator.

Moving averages can quickly guide you to look for those areas. There's no holy grail here, just a faster, less subjective way of doing analysis. Once you see a moving average, you now need to look to the left of it to confirm the area. Then consider a trade only when and if a reversal, or changing of the guard as we call it, occurs. These points are where the probabilities of the current trend reversing are likely, after a changing of the guard. If there is no price data to the left of the moving average you are viewing, consider the area of the moving average, if a reversal pattern occurs, questionable.

This is a starting point to a more simplified approach to technical analysis through moving averages. If you choose to build on it, Moving Averages can be used to interpret overbought and oversold momentum, relative strength and trend following. The moving average is one of the few technical analysis tool that can enable you to interpret so many variables as quickly and accurately.


 
 

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