How to Use Moving Averages for Profitable Trading Strategy and Potential Opportunities

  1. Technical Analysis
    1. How Technical Analysis Can Help You Make Informed Decisions in Mastering Stock Trading
    2. Technical Analysis Setting Realistic Expectations
    3. Introduction to Technical Analysis and Assumptions
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    5. Candlestick Charts How Line and Bar chart Enhance Market Analysis
    6. Japanese Candlesticks History, Anatomy From Ancient Japan to Global Trading Phenomenon
    7. Time Frames in Technical Analysis Unlocking the Power of Choosing the Right Interval for Successful Trading strategy
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    10. Marubozu Candlestick Setting Stop Loss The Ultimate Guide to Trading Patterns
    11. Spinning Top Candlestick Navigating Downtrends A Trader’s Guide to Identifying Reversal Signals
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    13. Paper umbrella and hammer candlestick pattern Unlock Profitable Trades
    14. Hanging man candlestick pattern Profitable share market trading Strategies
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    16. Engulfing Patterns and Bullish Engulfing Signals Unlock Trading Opportunities
    17. Bearish Engulfing and Doji for Trading Success Profitable Strategies with Candlestick Patterns
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    19. Bullish Harami Candlestick Pattern for Trend Reversal Strategies
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    25. Support and Resistance Advanced Trading Strategy Analysing Reliability and Optimisation
    26. Volume Trends How to Leverage for Successful Trading Strategy
    27. Volume Analysis A Key Checklist for Successful Stock Trading
    28. Moving Averages A Comprehensive Guide for Trend Analysis in Stock Trading
    29. How to Use Moving Averages for Profitable Trading Strategy and Potential Opportunities
    30. Moving Average Crossover Boost Your Trading Success with A Reliable Strategy
    31. Technical indicators How to Use Technical Tools for Better Decision-Making Unlocking the Power of Trading
    32. Relative Strength Index RSI Analysing Overbought and Oversold Signals to Boost Your Trading Strategy
    33. MACD How to Interpret and Utilize Moving Average Convergence and Divergence for Profitable Trading
    34. Bollinger Bands The Power of Indicators in Trading and checklist
    35. Fibonacci Retracements Unravelling the Power in Stock Markets
    36. Mastering Fibonacci Retracement A Step-by-Step Guide for Effective Trading
    37. Dow Theory Decoding Unveiling the Principles of Technical Analysis
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Marketopedia / Technical Analysis / How to Use Moving Averages for Profitable Trading Strategy and Potential Opportunities

Here’s an easy way in which the moving average can be applied: 

The moving average can be used to identify potential trading opportunities. When the stock price trades above its average, it suggests that traders are confident in the potential for prices to rise – indicating a potential buying opportunity.

When the stock price trades below its average, it suggests that traders are pessimistic about where the price is going and that there may be selling opportunities.

We can create a straightforward trading system from these results. It involves setting certain criteria to pinpoint when to enter and exit a trade.

Let’s define a trading system based on a 50-day exponential moving average. Essentially, an effective trading system provides you with an indication to initiate and execute a trade, so let us look at the rules for this specific approach:

When the current market price is greater than the 50 days EMA, invest in it and stay invested until necessary sell criteria are met.

Close any long positions once the current market price is lower than the 50-day exponential moving average.

This chart features the application of the trading system on GNA Axles, indicated by the black line, which is a 50-day exponential moving average.

Beginning on the left, B1@165 is marked on the charts as the first chance to purchase. Here, we can see that the stock price has gone above its 50 days EMA, so in accordance with our trading system’s regulations, we initiate a new long position.

We kept our position until we got an exit signal at 187 (S1@187), resulting in a profit of Rs.22 per share.

The subsequent signal to buy was at B2@178, and the next to sell was S2@182. Though this proved profitable, with a gain of Rs.4, the most impressive trade was B3@165 and S3@215, resulting in a Rs.50 gain.

Here is a brief overview of how the trading system performed in these trades.

It is clear that the first and last trades yielded a profit, while the 2nd trade was less successful. Upon further examination, it appears that the stock was trending during the 1st and 3rd trade but moved horizontally during the 2nd.

This brings us to an important conclusion about moving averages: they work best when a trend is present and are not as effective in relatively flat markets. In other words, the ‘Moving average‘ is essentially a trend-following system.

In the course of my trading career, I have observed a few essential properties of moving averages. Through firsthand experience, it is clear that they can provide efficient support in forecasting future trends and help identify buy and sell points.

  1. Moving averages provide numerous trading signals when the market is stagnant. However, most of these signals result in limited gains or losses.
  1. Usually, one of the many trades leads to a major rally, such as the B3@165 trade, and brings impressive gains.
  1. It would be difficult to differentiate the major success from the various minor trades.
  1. Consequently, the trader should not be selective in their approach when trading through a moving average system; rather, they should take all of the signals that the system provides.
  1. Remember that the moving average system will minimize losses, but a single large trade can make up for any losses and provide you with sufficient profits.
  1. The profit-making opportunities enabled by market trends can give you an advantage for weeks or even months. MA, therefore, serves as a helpful indicator for finding possible long-term investments.
  1. The primary factor in the MA trading system is to act on all signals generated without making any value judgements.

BPCL is another case where the MA system proposed multiple trades during a period of sideways movement. Unluckily, none of these turned out to gain any advantage. Fortunately, the final transaction produced an impressive 67% return over a period of 5 months.


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