So a 10 day moving average with take data of 10 current days and a 50 days moving average will take the data of 50 latest days. This helps in keeping the moving average line as close to the markets as possible. For the next day, the last trading day is removed from the calculation and the new data is added to it. Moving Average is a technical analysis tool which smoothens the day-to-day fluctuations of the market or helps in removing the ‘noise’ or volatility in the market.Ī 5 day moving average is formed by taking the average closing price of five recent days. One of the oldest and commonly used trends following strategy is by using the moving averages. Most successful traders have been trend followers.Īlso Read : Trend, Trend lines and rule of their breaking Moving Averages But when they are right they ensure that they make enough not only to repay the losses of the 60 percent trades but also have enough in the bank to have a comfortable life style. Some of the best traders in the world who follow the trend following strategy are right only 40 percent of the time. Since markets are consolidating nearly 70 percent of the time, trend following trading strategy results in a number of whipsaws. A whipsaw in trading is when the trader is stopped out after he has initiated a trade. But as mentioned above every trend trading strategy will witness what in trading parlance is known as whipsaws. Trend following strategies are basically those where a trader tries to capitalize on a stock or a market that is likely to go in one direction, either up or down. That is the bane of a trend following strategy. A trader’s patience is tested in trying to locate a market or a stock which is ready to move. Nearly 70 percent of the time will be wasted in trying to locate your friend. The challenge and the struggle of the trader are clear from this data. Markets are known to be moving in a trend in only 30 percent of the time and consolidating or moving aimlessly for 70 percent of the time. The problem for a trader comes in trying to locate this evasive friend. One of the most famous adage in the markets is ‘Trend is your friend.’ Only if the prices move in the trader’s direction will he make money. 5-9 day short term moving average rule for share trading Many others have left the game after losing their shirts. Many successful traders have spent millions trying to find the perfect trend following strategy before they could trade with one that they are comfortable with. Trend followingīut this is easier said than done. Similarly the maximum period he holds on to the trade before the trend changes the larger profit the trader is able to corner. The earlier one gets in a rising or falling trend the higher are his chances of winning. Trading is all about trying to benefit from a price movement.
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