ES Emini Day Trading: Exponential Moving Averages vs Simple Moving Averages
Dec0
Moving averages are an integral part of most day traders indicator arsenal, and getting two traders to agree on which indicator is the best, or which configuration yields superior results is an argument that will rage on forever. There is simply no agreement as to exactly what works best-and that is as it should be, because no two traders trade with same mind set and personality.
In the world of moving averages there are two contenders for consideration. The diminutive simple moving average (SMA) and the more complicated exponential moving average (EMA). Because the EMA has a more sophisticated method of calculation, many consider it to be the superior of the two averages, but that would be jumping to unfounded conclusions.
The SMA is a basic arithmetic mean: you add together the closing prices from the last 10 periods then divide the product by 10. As I said, the result is a simple arithmetic mean. Pretty simple? Too simple for some people, especially those who tend to associate complexity with efficiency.
Complexity does sometimes yield superior results, but that is not always the case.
EMA’s are really not that much more difficult to calculate. The formula is simply 2 (n+1), and the result is added to the prior days exponential calculation. With some simple deduction you will see that an EMA emphasizes the most recent days prices, or weights the most recent days prices more than prices early in the exponential sequence. Since any moving average uses historical data, or data that has already occurred to calculate the average, any moving average can be considered a lagging indicator. It should be obvious, then, that the purpose of the EMA is to “speed” up the lag factor that is inherent in all moving averages.
Do EMA’s really speed up the lag factor?
To a certain extent EMA make the lag factor in moving averages less distinct, but like all things, there is a cost. EMA’s are notorious for causing a raft of early buy and sell signals, as the last variables in the sequence overweight the average. For that reason alone, I am not a huge fan EMA’s and prefer SMA’s. Does that mean SMA’s are better than EMA’s? Not at all, all it means is that in my trading mentality I am far more comfortable with the results from an SMA than I am an EMA.
I always strike an 89 period SMA on my charts and watch the price action relative to the price action and the SMA. If the price action in more than 3 or 4 points below the SMA(on the ES contract) I immediately decide that long trades are out of the question until the price action moves closer to the SMA, and visa versa on price action about the 89 period SMA. I can also glean some nearly instant information regarding the trend of the market by looking at the slope of the 89 period SMA, and the sharper, or more pronounced the slope appears, the stronger the trend.
I also use a number of paired moving averages to back up some of my entry and exit points. I generally use Fibonacci numbers starting with 5 and up to form my two moving average lines. I find it best, on short term trading, to use to SMA’s that are within 15-20 points of each other. I will leave to you to discover which set of moving averages intersect at point which best suit your trading style.
So we’ve talked a bit about moving averages today, and seen some applications for the SMA. The EMA’s are also used by many traders and I would encourage you to explore the applications for this moving average.
I endorse a state of the art trading program for beginners at Trading Concepts, Inc It’s an awesome product that will have you well on your way to success. Plus, it has a money back guarantee…you have nothing to lose and thousands to gain.
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ES Emini Day Trading: Simple Moving Averages
Dec0
One of the simplest and informative trading indicator one can utilize is some version of a moving average. I use them in my own trading, and you should consider doing the same. They are simple in structure and most charting programs have several different types of moving average formulas built into their indicator package.
In my trading, I strike an 89 period moving average on every chart I trade. If the price action is significantly below the 89 period moving average, or has spent most of the day below the average, I simply eliminate any long trade from my thinking.
Why?
I hate trading against the trend and prolonged action significantly below the 89 period SMA tells me the trend for the day is short. Not wanting to imitate a salmon swimming upstream, I simply concentrate on short trading for the rest of the day and avoid the pitfalls of counter trend trading. I realize some people absolutely love digging out that one great countertrend trade, because often they are big gainers, but the number of countertrend trades that set-up looking great, then turn tail back short far outweigh my risk tolerance. I let the others hit the home runs, and settle for three or four singles, with an occasional double thrown in for good measure. In any event, trading with the trend keeps me out of harms way and those devastating big losing trades. I also use the formula for long trades, if the price action is significantly above the 89 period SMA, or stays above the 89 period SMA for a prolonged time, I eliminate any short trades from my thinking. Same principle, I want to stay in the trend.
If the price action is alternating above and below the 89 period SMA all trades are on the table, as no clear trend is established. Further, I don’t concern myself if the price action is one to three points within the 89 period SMA because this certainly isn’t significant deviation from a daily trend. Normal market noise will have the price action oscillating above and below the moving average. No, I am looking for major breaks below the 89 period SMA for my decision process.
So, what is a simple moving average, anyway?
Let use a simple five period simple moving average. The last five periods price has been:
5+6+5+7+4=27
(27/5)=5.4
So the moving average for this five period average has been 5.4. As each period passes a new SMA is calculated and a smooth line connecting these points forms. Voila! You have yourself a moving average line. It’s not uncommon to calculate two different moving averages simultaneously and gauge your entries and exits based on the intersection of these lines. The length of the time period for each SMA depends entirely on the time frame of your trading, with longer term traders using much longer SMA period numbers and short term traders using much shorter SMA period numbers.
Try incorporating some of these moving average techniques into your own trading and you may find a bounty of information you have been missing. Moving averages are valuable tools in the trading process and because of their simplicity are often overlooked.
I endorse a state of the art trading program for beginners at Trading Concepts, Inc It’s an awesome product that will have you well on your way to success. Plus, it has a money back guarantee…you have nothing to lose and thousands to gain. Article Source:http://www.articlesbase.com/day-trading-articles/es-emini-day-trading-simple-moving-averages-1562520.html
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The Secret To Technical Analysis
Jul0
Technical analysis of the stock market, or any other market such as Forex, Bonds, Futures, is how most traders and investors make their trading decisions. This is as opposed to fundamental analysis which most people more agree is pretty much done as a way of making trading decisions, unless of course you are Warren Buffet!.
You only have to think back to recent stock market scams like Enron to know that it is almost impossible for the average, and even very sophisticated fund manager or hedge fund trader to really know what the real financial state of a company is.
Just by reading the balance sheet and other quarterly reports they release gives you a very limited insight into the real health of the company. Whereas the technical analysis charts of the company tend to give the real picture of what the market thinks of the value of the company. In the case of Enron even simple technical analysis told you to SELL when the stock was in the $80-90 range, this is why technical analysis of stocks is so popular.
So what are the secrets to technical analysis?, I’m about to tell you, here are my golden rules:
* Only use 3-5 simple technical analysis indicators
* Make sure that you understand how the indicators that you have selected work, what the parameter settings are and in what market conditions they are effective
* After selecting your indicators and parameter settings don’t mess with them.
The real secret to technical analysis is to get VERY familiar with your choosen indicators, and really this can only be done by watching and studying the market, so that you get to the point that you TRUST them.
The fact is that in any market, for each bar, there are only 5 pieces of information, the open, close, high, low and volume, yet there are now hundreds of indicators. Most of these indicators are displaying the same information and so are redundant.
For the record my set of indicators are:
* 4 Simple Moving Averages
* Bollinger Bands
* MACD
* Stochastics
But the way I use them is quite special, to learn more about how to become an expert at technical analysis visit:
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