Best Moving Average Strategies For Day Trading

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The best moving average strategies for day trading are:

  • 1

    5-8-13 moving averages

  • 2

    Determine entry and exit levels with 20 EMA

  • 3

    Trend trading with multiple averages (13-26)

  • 4

    The Golden and Death Cross

  • 5

    MA Mean reversion with Bollinger Bands

Day trading, with its fast-paced and dynamic nature, is a strategy that can reap substantial rewards for those who master it. Moving averages are not just lines on a chart; they are vital indicators used to discern market trends, identify potential support and resistance levels, and smoothen the turbulence of price volatility. In this article, the experts at TU will delve into the art of day trading with moving averages, exploring their significance, different types, and a range of strategies that can help traders to be profitable.

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5 Best moving average strategies for day trading

Experts have identified the following to be the 5 best moving average strategies for day trading :

5-8-13 moving averages

5-8-13 moving averages

5-8-13 moving averages

For day trading, the combination of three simple moving averages (SMAs) - the 5, 8, and 13-bar settings - provides a robust foundation. These settings, rooted in Fibonacci principles, have proven their worth over time. However, effectively utilizing them requires an understanding of price relationships and the slopes of moving averages. When the 5-day MA crosses above the 8-day MA, a buy signal is generated. This signal is confirmed when the 5-day MA continues its momentum to cross above the 13-day MA. Short signal, understandably, is generated in an exact opposite scenario.

The day trader's process involves visually assessing how these moving averages relate to price and monitoring their slopes to capture short-term momentum shifts. An increase in observed momentum presents an opportunity for buying, while a decrease may signal the right time to exit a trade. Additionally, when these decreases lead to bearish moving average crossovers across multiple time frames, it may be a sign to explore short sale opportunities. In such cases, successful short sales should be covered once the moving averages start to rise. This strategy is also instrumental in identifying sideways markets, signaling to traders that it's best to wait when intraday trends are weak, and opportunities for profit are limited.

Determine entry and exit levels with 20 EMA

Determine entry and exit levels with 20 EMA

Determine entry and exit levels with 20 EMA

One of the core strategies when employing moving averages is to pinpoint entry and exit levels effectively. This process commences with selecting the most suitable type of moving average, such as Exponential Moving Averages (EMA), Volume Weighted Moving Averages (VWMA), and Smoothed Moving Averages.

After selecting the appropriate MA, the next step involves deciding on the ideal period to apply to your chart. A crucial aspect is recognizing when an asset's price crosses below a particular moving average. Such a scenario presents an opportunity for short-selling, while it could also be an opportune moment to exit a long position. By strategically applying these moving average strategies, day traders can make informed decisions on when to enter or exit the market, thus enhancing their chances of success.

Trend trading with multiple averages (13-26)

Given the inclusion of longer-period MAs, this strategy potentially garners better accuracy than the 5-8-13 MA strategy at the cost of delayed entry signals. When the 13-day MA crosses above the 26-day MA, a buy signal is generated and vice versa. Unlocking the potential of this systematic characteristic can provide a robust strategy for those pursuing trend following in such markets. Traders can effectively capitalize on this by buying in an uptrend or selling in a downtrend. This approach proves invaluable in pinpointing precise entry points within a robust trend.

Trend trading with multiple averages (13-26)

Trend trading with multiple averages (13-26)

The Golden and Death Cross

The Golden and Death Cross

The Golden and Death Cross

Among the most commonly employed trading strategies is the moving average crossover technique, with particular emphasis on shorter-term and longer-term SMAs. The golden cross and death cross exemplify this approach, typically involving the 50-day and 200-day moving averages. The death cross transpires when the 50-day SMA crosses beneath the 200-day SMA, generating a sell signal. Conversely, the golden cross indicates a bullish sentiment, emerging when the 50-day SMA transcends the 200-day SMA, signifying a buying opportunity.

Mean reversion with Bollinger Bands

Mean reversion with Bollinger Bands

Mean reversion with Bollinger Bands

Day traders often turn to mean reversion strategies, frequently incorporating the Bollinger Bands, with the 20-day SMA positioned at the core of these bands. This approach hinges on the notion that, even within intensely trending markets, prices often revert to their mean—signified by the 20-day SMA—before resuming their overall directional trend. Thus, the 20-day SMA serves as a pivotal reference point for support and resistance, facilitating informed buying and selling decisions.

This strategy is aptly illustrated in the chart, where the price initially descends beneath the 20-day SMA. This indicates a transition from a bullish to a bearish sentiment. Following this, a reversion to the 20-day SMA unfolds, presenting numerous enticing selling opportunities. To bolster your strategic approach, you can employ the upper Bollinger band as an effective stop-loss tool or reference prior swing highs for informed and profitable trade executions.

What are moving averages?

Moving averages (MAs) are essential tools for traders in the financial markets. They serve as technical indicators that help identify trends and filter out price fluctuations. Think of them as a mathematical way to determine the average price by considering historical data. While traders use various types of MAs, the 50-day and 200-day moving averages are quite popular in stock market analysis.

In essence, MAs work as a sort of trend radar. In an uptrend, a moving average provides support, acting as a price floor. Conversely, in a downtrend, it acts as resistance, forming a price ceiling. For intraday traders who buy and sell within the same day, shorter time frames are crucial.

The best moving average for intraday trading is flexible, based on your specific trading goals. Some traders opt for exponential moving averages, which give more weight to recent price data and are useful for capturing short-term trends.

So, how do you calculate a moving average? It's simpler than it might sound. You sum up a set of numbers over a defined period and then divide by the total number of values in that set. For instance, if you wish to find the moving average over a five-year period, you'd add up the values from each year and divide by five. MAs are like finding the “middle” value in various subsets of data, and they serve as an invaluable tool for forecasting both short-term and long-term trends.

Types of moving averages

  • Simple Moving Average (SMA)
    The SMA is the most common type of moving average. It's calculated by adding the asset's prices over a specific period and dividing the total by that period's length. However, it treats all time periods equally, which means older data holds the same weight as newer data. While the SMA is helpful for identifying trends, support and resistance levels, reversals, and stop points, it may not respond quickly to recent changes in an asset's price

  • Exponential Moving Average (EMA)
    The EMA aims to overcome the lagging issue of the SMA by giving more weight to recent data. In a 200-day EMA, for instance, the most recent data points hold more significance than those from 200 days ago. It calculates the SMA first, then determines a multiplier, and finally calculates the EMA using this multiplier. The EMA reacts more swiftly to price changes compared to the SMA

  • Weighted Moving Average (WMA)
    Similar to the EMA, the WMA seeks to reduce noise in the simple average by assigning greater importance to recent data. It multiplies each price by a weighted factor, and the formula takes this form: WMA = (P1 * 5) + (P2 * 4) + (P3 * 3) + (P4 * 2) + (P5 * 1) / (5 + 4 + 3 + 2 + 1). Consequently, the WMA closely tracks price movements and can provide more accurate signals

  • Smoothed Moving Average (SMMA)
    The SMMA, like the EMA, aims to reduce noise within the SMA. It focuses on a longer time frame and treats recent prices equally as historical data, rather than following a fixed period. This approach helps to create a smoother representation of price trends

  • Volume Weighted Moving Average (VWMA)
    Unlike other MAs that solely consider asset prices, VWMA incorporates trading volumes, providing insights into the market's dynamics. The formula for VWMA is: Sum of (closing price x Volume) / Sum of Volume. It offers a comprehensive view of price and volume interactions, aiding traders in decision-making

These are just a few of the various moving averages used by traders, each with its unique characteristics and advantages. Additional types include the Least Squares Moving Average (LSMA), which minimizes the impact of price outliers, and the Arnaud Legoux MA, designed to address challenges posed by other MAs by simultaneously calculating multiple moving averages.

What are some alternate periods for day trading?

  • 9 or 10 periods
    For short-term day traders, speed is of the essence. The key is to have a moving average that swiftly reacts to price fluctuations. This is where Exponential Moving Averages (EMAs) truly shine. Among the possible options, a moving average set at 9 or 10 periods stands out as an excellent choice. It's renowned for its rapid responsiveness, making it particularly well-suited for day trading. Many traders utilize it as a directional filter. This means it serves as a reliable tool for identifying the prevailing trend's direction and strength. If you need a quick gauge of which way the wind is blowing in the market, this is a dependable choice

  • 21 Periods
    This is a medium-term option, highly valued for its precision. If your day trading strategy involves riding trends, the 21-period moving average is your companion of choice. It does an admirable job of aligning with the market's direction. As a day trader, this offers you a reliable gauge for identifying trends and making well-informed decisions

  • 50 Periods
    This longer-period moving average is ideal for charting the longer-term course of the market. If your day trading strategy seeks to identify the broader directional movement, this is the moving average period to rely on. It is the go-to tool for those who want to keep their eyes on the horizon while navigating the complexities of the trading day

How to use moving averages correctly?

  • Choose the right type of moving average
    The first step in using moving averages is selecting the right type. There are two main contenders: Simple Moving Averages (SMA) and Exponential Moving Averages (EMA). SMAs are like the steady ship of the moving average world, calculated by summing up closing prices over a specified period and dividing by the number of periods. EMAs, on the other hand, are the speedboats. They give more weight to recent prices, reacting faster to changes. Your choice should align with your trading style and objectives. If you favor swifter reactions and adaptability, the EMA is your partner. If steadiness and reliability are your preference, then the SMA is your friend

  • Determine the right length
    Now, let's delve into the essence of the moving average: the length. This is like choosing the lens through which you'll view the market's trends. You can opt for shorter views of 10 or 20 periods or extend your horizon with 50, 100, or 200 periods. The length of your moving average significantly influences your grasp of trend directions and the identification of support and resistance levels. Shorter lengths provide a more immediate perspective, while longer lengths offer a broader and more gradual outlook. Carefully selecting the right length ensures that your moving average matches your objectives

  • Combine multiple moving averages
    Sometimes, one moving average is not enough. To gain a clearer insight into the market's movement, traders often use two moving averages. In an uptrend, the quicker moving average should be situated above the slower one, and vice versa for a downtrend. This combination strategy enhances the visibility of the trend's strength and direction. It's like using both binoculars and a telescope to explore the vast terrain of the financial markets

  • Blend with other technical indicators
    Moving averages, while powerful, are most effective when they work in harmony with other technical indicators. They provide a yes-or-no signal about whether a trend is forming. To make well-informed decisions, consider coupling your moving averages with tools like Bollinger Bands, Envelopes, the Average Directional Movement Index (ADX), or the Moving Average Convergence Divergence (MACD). Each adds a layer of insight to your trading strategy, offering a holistic view of the market's landscape

  • Chart patterns
    Adding another dimension to your moving average strategy, you can combine them with chart patterns. Chart patterns provide a visual roadmap of the market's behavior. When integrated with moving averages, they become potent allies in deciphering trends. By using moving averages in tandem with chart patterns, you'll have a roadmap and a compass to navigate the financial landscape, charting your course with confidence and precision

  • Creating an expert system
    Lastly, consider creating a trading system or Expert Advisor (EA) tailored to moving averages. In the past, this required a deep understanding of statistics and computer science. Today, many brokers offer user-friendly platforms for crafting your own expert systems, even if you're not a tech wizard. These systems automate your trading strategy, allowing you to maximize the benefits of moving averages without the need for manual calculations or execution. The result is a streamlined and efficient approach to trading that keeps you one step ahead of the markets. Though it is important to exercise caution when navigating the EA landscape for trading activities

Pros and cons of day trading moving average strategies

👍 Pros

Reliability in technical strategies
Moving averages are the dependable companions of technically-based day traders. They add an element of trustworthiness to your trading strategies.

Trend detection and support/resistance zones
Moving averages are like trend scouts. They help you recognize the trends that might otherwise remain hidden in the market's wilderness. These indicators also assist in mapping out support and resistance zones, offering guidance and safety as you navigate through the trading landscape.

Smoothing out volatility
Consider moving averages as a tool for smoothing market data. They serve as a stabilizing element, offering a precise representation of a stock's actual trajectory. By mitigating the turbulence of price fluctuations, they provide an analytical perspective on a stock's genuine behavior.

Enhancing decision-making with other indicators
Moving averages are not solo artists. They perform brilliantly in ensembles, particularly when paired with other technical indicators. Together with tools like Bollinger Bands, Average Directional Movement Index (ADX), or MACD, they form a chorus that helps you make well-informed trading decisions.

Blueprint for winning strategies
Moving averages, when skillfully employed, are not just tools; they are the blueprints for your trading strategy. By incorporating these steady indicators into your approach, you increase your chances of developing a winning game plan.

👎 Cons

Lagging behind rapid changes
The Achilles' heel of moving averages is their tendency to lag behind. They rely on historical data, which can be like reading yesterday's news in today's fast-paced market. This lagging nature may result in untimely signals when you need to act swiftly.

False signals in choppy markets
Like a weather vane in unpredictable winds, moving averages can sometimes point you in the wrong direction. During periods of market choppiness or when the market is locked in a range-bound dance, moving averages might generate misleading signals that could lead you astray.

Inflexibility in parameters
Moving averages are known for their unwavering nature. They don't adapt to change very well. With fixed parameters such as the time period used for calculations, they might not be the best tool when the market environment is shifting rapidly.

What are the Benefits of Using Moving Averages for Day Trading?

Moving averages stand out as a preferred technical tool for day traders. Let's dive deep into the prime benefits of leveraging moving averages in day trading:

Spotting Trends: Moving averages streamline price data, eradicating distractions. This clarity makes trend spotting straightforward for traders.

Shifting Support and Resistance: These averages don't just show price trends; they double up as fluid support and resistance markers. Traders pinpoint ideal trade entry and exit points using these levels.

Generating Trade Signals: Introducing multiple moving averages into the mix can create trading cues. Take this scenario: a short-term moving average surging above a long-term one might hint at a buying opportunity. On the flip side, if the short-term drops below the long-term, it's possibly time to sell.

Validating Price Movements: Do you ever need an extra layer of assurance? Moving averages can do just that. An asset price above its moving average often indicates a positive trend, while one below suggests the opposite.

Tailored to Your Needs: One size doesn't fit all in trading. Fortunately, moving averages adapt. Depending on risk appetites and specific strategies, traders can tweak them to their liking.

Using moving averages effectively can be a game-changer for day traders. It's about getting accurate, timely insights to make informed decisions.

What Are the Risks and Limitations to Moving Averages in Day Trading?

Moving averages rank high as a favored tool in day trading. They help pinpoint trends, highlight potential support and resistance zones, and initiate trading signals. Yet, like all tools, they come with their set of challenges. Let's unpack these:

Lagging Indicator: Moving averages draw from past data, which can sometimes leave traders a step behind in fast-shifting markets. Their reliance on history means they might miss the mark in turbulent or stagnant market phases, leading to misleading signals.

Fixed Parameters: With set parameters like time frames for calculations, moving averages don't always adjust well to swift market shifts.

Not Standalone Tools: Trust moving averages alone, and you'll find them falling short in several areas. Their seven distinct drawbacks range from the risk of misguiding signals to their inability to peer into the future. Being anchored to past price actions is another limitation.

Defensive Attributes: Consider how trading ranges behave: they widen in unstable markets and tighten when trends are absent. Moving averages mirror these shifts. So, when day trading, these patterns demand attention. Recognizing them is crucial as they heavily influence profit and loss outcomes.

However, it's not all that bad. When paired with other technical tools and smart risk strategies, moving averages shine in day trading. Grasping their essence and applying them judiciously in day trading scenarios is key.

What Other Technical Analysis Indicators can be used for Day Trading?

Technical analysis indicators serve as crucial tools for day traders, helping them uncover opportunities and shape their trading decisions. Among the vast toolkits available, several stand out due to their proven efficiency. Here's a look at some top choices:

Moving Average

This indicator showcases an asset's average price over a specific timeframe. The 200-day simple moving average, for instance, is a favourite among traders as it sheds light on the longer-term market trends.

Relative Strength Index (RSI)

As a momentum oscillator, the RSI evaluates the speed and direction of price movements. Traders turn to it to identify markets that might be overbought or oversold.

Moving Average Convergence Divergence (MACD) indicator

This momentum-focused indicator highlights the connection between two moving averages of an asset's price. It's a go-to for traders aiming to detect changes in momentum, trend direction, and the vigour of a trend.

Bollinger Bands

Primarily a volatility tracker, this indicator has a central moving average surrounded by two standard deviation bands. It's essential for spotting markets that are potentially too hot (overbought) or too cold (oversold).

Stochastic Oscillator

A momentum metric at its core, stochastic oscillator contrasts an asset's closing price with its price range over a particular span. Traders find it invaluable for identifying possible trend shifts and markets that are either overbought or oversold.

Ichimoku Cloud

This all-encompassing trend tool displays support and resistance areas, momentum, and trend direction. Ichimoku Cloud aids traders in identifying potential trend changes and the best moments to enter or exit a trade.

Average True Range (ATR)

Focusing on volatility, ATR indicator calculates the average price fluctuation over a set period. Many traders use it to spot price breakouts or to determine where to place their stop-loss orders.

Traders aren't expected to use every indicator available. Instead, they should select a few that align with their strategies and genuinely aid their decision-making process. Each technical tool should genuinely contribute, steering traders towards more informed decisions.

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FAQs

Do day traders use moving averages?

Yes, many day traders use moving averages as part of their technical analysis to make trading decisions. Moving averages help them identify trends, potential support and resistance levels, and entry and exit points for their trades.

Which moving average is best for day trading?

The choice of the best moving average for day trading can vary depending on the trader's strategy and preferences. Shorter-term moving averages like the 9 or 10 EMA are often popular among day traders because they react quickly to price changes. However, the best moving average may also depend on the specific assets being traded and the trading goals.

How to use 5 8 13 EMA?

The combination of 5, 8, and 13 Exponential Moving Averages (EMA) is a strategy often used in day trading. These EMAs are applied to a price chart to identify trends and potential entry and exit points. Traders look for crossovers and the relative positions of these EMAs to make trading decisions.

What EMA and MA is best for day trading?

The best Exponential Moving Average (EMA) or Simple Moving Average (SMA) for day trading can vary based on the trader's style and the assets being traded. Shorter EMAs, like the 9 or 10 EMA, are commonly used for their responsiveness to price changes. Traders should choose the EMA or SMA that aligns with their trading strategy and goals.

Team that worked on the article

Chinmay Soni
Contributor

Chinmay is a certified Investment Analyst and Portfolio Manager by the National Stock Exchange (NSE) Academy. He is currently associated with a $75 million VC fund and assists them in identifying and researching investable sectors and start-ups. He has completed his Bachelors of Business Administration from the Institute of Management, Nirma University and is currently pursuing MBA majoring in Finance from the same. He has 4 years of hands-on investment experience in a variety of asset classes and his professional qualifications include being a CFA Level 2 candidate and NSE Certified Market Professional Level 2.

He finds writing as a way to express his thoughts and share his knowledge with people eager to learn. He himself happens to be an avid reader of personal finance books and on top of his recommendation list are the international bestsellers ‘The Psychology of Money’ and ‘Think and Grow Rich’

He has this one strong belief as his motto: Life is what you make of it.

Dr. BJ Johnson
Dr. BJ Johnson
Developmental English Editor

Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.

The topics he covers include trading signals, cryptocurrencies, Forex brokers, stock brokers, expert advisors, binary options. He has also worked on the ratings of brokers and many other materials.

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Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.