Selecting appropriate moving average periods

The time frames of your moving averages are determined by the number of closing prices you include. To decide on that number, consider the types of trading decisions you make based on your moving average. Pick a time frame that's appropriate for the amount of time you intend to have a trade on. For a trade that's to be held for only a day or two, a five- to ten-day moving average will suffice.

For instance, the five-day example in Figure 11-3 is very short-term and is most useful for traders who trade for a day or two, or even for less than a day. I trade a system based on a moving average that uses data from only the two previous days' closing prices. The holding period for this system is just half a day, so the short moving average makes perfect sense.

The range of moving averages I've seen used on charts varies from 2 days to 200. A 200-day moving average is very long-term, but in many circles it's considered very significant when determining a stock's long-term trend. In fact, the common definition of a long-term bull or bear market can be whether an index is trading above (bull) or below (bear) its 200-day moving average.

Was this article helpful?

0 0

Post a comment