Moving Averages and price in different time frames appear differently

JamesKL

Moving Averages and price in different time frames appear differently. I don't understand how to interpret the SMA in different time frames: example is attached for one year weekly and six months daily. I see them in different relative positions. Am. I doing something wrong. Or I don't understand what I am seeing

markd

No example attached, so not sure what you are asking.

A few notes about moving averages:

Moving averages have a length, that is, the number of data points used to calculate the average.

If you use the same length in two different time frames, e.g. 13 weeks and 13 days, you will get very different results. The data points for the weekly average will use 13 consecutive Friday closes. The data points for the daily average will use 13 consecutive daily closes (about 2 1/2 weeks). So the data used to calculate the averages will be very different, and they will look very different.

You can make moving averages for different time frames look similar, if they cover the same amount calendar time. For instance, if you have a 13 week moving average and a 65 day daily moving average (13 weeks x 5 days in a week = 65 days), they will look pretty similar - in other words, they should follow pretty much the same curve, and price should cross each moving average around the same time (e.g. the daily crossover will probably be in the same week as the weekly crossover, or within a bar). The two plots won't be exactly the same because the weekly average is calculated from 13 data points and the 65 day from 65 data points. If the data are not the same, the results will differ.

Shorter length MAs, no matter the time frame, tend to stay very close to prices, so if the stock moves sharply, so does the average. There will be more crossovers because prices tend to stay within range of just a few bars.

Longer MAs, no matter the time frame, tend to lag prices much more, and so they are smoother and more wave-like, with fewer crossovers.

For some traders/investors, MAs are a trend indicators. For trend followers, If the MA is up and price is above the MA, they trade long set ups (price dips). If the MA is down and price is below the MA, they take short set ups (rally peaks). The optimal length of an MA can vary with the behavior of the stock and your objectives. Popular short term lengths are 8, 13 and 20.

Some traders will trade the crossover itself (e.g. price close above or below the MA), other will wait for a couple of closes, or for a test of the MA (prices moving back toward but not back across the MA) to make sure the change in direction is "real".

Other traders use crossovers of shorter and longer moving averages. Well known examples are the "golden cross" - the 50 day crossing above the 200 day, and the "death cross" - the 50 crossing below the 200. But there are shorter term possibilities, too - the 3 and 13, 8 and 20, etc.

I'm not sure if that answers your question...

JamesKL

MarcD: The a lot your answer was great. I am just a beginner using technical analysis and don't know yet how I should pick my exit point on a long uptrend position. I was thinking of using the MacD as the indicator to exit. Not sure if this makes sense or not

JamesKL

MarkD
Regarding MA; do I understand then that I should only be looking at price in relation to MA on daily charts and not weekly charts especially when looking for crossovers

markd

If you want to trade based on MAs, which MAs you use depends on the kind of trading you want to do. Do you want to be in and out in a few days ? Then you would use short daily MAs. Do you want to capture a move that lasts a few weeks? Then you would want to use longer daily MAs. If you want to work with moves that last several months, then you would use weekly MAs.

Which kind of trading you do is mostly a matter of temperament - and maybe time available. If you are OK waiting for a reward, longer term trading could work for you. If you like to get paid more often, you would probably go for shorter term trading. Short term trading has added costs in commissions or slippage or both, and probably more small losses.

As for entries and exits, there is no one right way. The safest kind of trading (in late, out early) leaves money on the table on both ends of the trade. But the more daring kinds of trading (in early, out late) can cost you a lot by getting stopped out with losses on false entries, or overstaying the stock expecting it to go up more while it in fact keeps going down.

The usual advice is to come up with a system first, and then backtest it on paper before trading with real money. How much back testing is always a question. (I would say at least a hundred trades in each stock.) But any period you choose should include both up and down markets (200 moving average rising, 200 MA falling). No two stocks trade exactly alike, so what you learn testing one stock may not be transferable to another. Also, even the same stock will trade differently overtime, sometimes in smooth regular waves, other times choppy, other times flat. Large cap, high volume stocks tend to trade more smoothly, but with lots of exceptions. ETFs can work pretty well too because they average the movement of all the stocks inside. Once you get the hang of it, trades should be more consistently profitable, but gains would be smaller, usually, than individual stocks.

JamesKL

Thks MarkD: much appreciated

markd

@JamesKL I should have added, if you are longer term oriented, a good book to get started is Stan Weinstein's "Secrets for Profiting in Bull and Bear Markets". Pretty easy to read, great chart examples and self-tests in recognizing new trends. A classic. Probably available on Amazon. If the copyright has expired, it might be available for download in pdf. But don't go to pdf sites unless you have strong antivirus/security software.

lmkwin

If you are new to technical analysis and want to study/use the Moving Averages, a really good resource for system information over the years has been Arthur Hill and his StockCharts.com blog postings.

https://stockcharts.com/search/?blogAuthor=Arthur Hill&q=moving average cross&section=blogs

He also discusses MACD vs PPO, suggesting PPO is a better tool for using as a comparison tool across different securities as it's normalized where MACD isn't. They both use the same data. Another advantage for PPO is on a longer term, it will chart more clearly historical data than MACD. Note how the MACD is showing on the left side of the chart vs the PPO.



Something that many technical analysts feel is important are horizontal lines. These may reflect prior support and resistance levels. An effective manner to see these is to use Price Channels. Price Channels will display the high and low for the period of the Price Channel. Higher and Lower Highs and Higher or Lower Lows are easily seen with Price Channels. Their display can also assist in seeing Darvas Box activity, where a new high is made, pullback, and breakout.

You can also replicate Price Channels using Chandelier Exits. Chandelier Exits are also something that Arthur Hill has written about in blogs. Nice thing about Chandelier Exits is that you can adjust them to be a multiple of ATR for the period. The chart below shows the Price Channel in the top panel and the Chandelier Exit "price channel" in the lower panel. The Chandelier Exits are adjusted to be 1 ATR inside the traditional Price Channel placement.

JamesKL

Thks a lot guys (Imkwin & MarkD) your responses are much appreciated