Technical analysis is one of the most subjective fields of study. People from varied disciplines, such as accountants, economists, engineers, and others, have produced numerous advancements in this sector throughout history. It could be an indication of price movement theories such as Dow and Eliot Wave Principles. All of them are tried and true ways, each with their own set of advantages and disadvantages. But, in my opinion, if there’s one element that holds true across all of them and is employed by almost all market players at some point in the decision-making process, it’s none other than MOVING AVERAGES, which is my personal favourite (MA).
I’m not going to discuss any methods or how to use moving averages in this article. Rather, I’ll give some fascinating facts about the subject.
Moving averages are nothing more than a line drawn on a chart that represents the average of a set of data over a set period of time. It is adaptable because the period can be changed to suit your needs. That’s everything you need to know about them.
Many people have proposed their own versions of moving averages in the past, including Hull, Triangular, Double Exponential, Triple Exponential, Welles Wilder, and others. They may have been beneficial to some, but they were unable to attract a large number of users. Simple Moving Average (SMA) and Exponential Moving Average (EMA) are two popular forms (EMA). SMA is derived using an exponential approach, whereas EMA is produced by taking the data at face value.
Take note of the highlighted portion in the sample above. Reliance was on the rise. The 20 moving average functions as both support and resistance in a trending market. However, the price had closed below the 20 SMA for six days in a row, leading consumers to feel the trend had changed, but it had also taken support at the 20 EMA. This demonstrates EMA’s superiority to SMA, and that is enough for me to prefer it over SMA.
What is the significance of the numbers 20, 50, and 200?
As you can see, many professional traders employ the use of moving averages in their trading strategies. And you can bet that 20 & 200 is usually one of them. The 50 period is not utilised as frequently as the 20 and 200 periods. Nonetheless, it is quite important for traders.
If you open a chart and apply the 20 and 200 EMAs, you’ll notice that they almost always perform well. They never fail to amaze me with how much the price respects them at all times. It isn’t any form of magic. They also have a tendency to fail at times. However, the amount of time they operate in your favour is significantly greater than the number of times they fail.
I’ll tell you why they’re so successful. It’s because, like ourselves, the vast majority of traders (including institutions) rely on them. When the price reaches the 20 EMA in an uptrend, buyers rush in and lift it from there. It’s known as the ‘Kiss & Bounce.’ And it’s because of this that they practically always work. In the same way, the 200 EMA functions in the event of larger movements.
There’s another reason why I prefer the 20 EMA to any other indicator. It attracts the price like a magnet. Price cannot stay away from 20 moving averages for an extended period of time. It will eventually snap back at it. The entries with a 20 moving average were found to be superior to those with a higher moving average.
It can be used in any time period and still perform flawlessly.
The chart above is from NAUKARI. The time limit is 5 minutes. It reached an all-time high on January 5th and increased by 14% intraday. Take note of the first highlighted section. Price initially broke the first 5-minute high but was unable to move much. When it kissed and bounced from 20 EMA, it moved. Buyers flocked to the area, and stock prices skyrocketed throughout the day. Then, the next day, there was some profit booking, but it didn’t move below the 20 EMA. It took the support and climbed back up.
These are just a handful of the key points I’ve made concerning moving averages. It has the ability to do magic if utilised correctly.