Moving Average Questions

There's some really common questions about moving averages that you need to know the answers to so that you know how to use them in your trading to get better trading results. But before we go any further, make sure you hit the subscribe button and give this video a thumbs up so that you get notified of all of my future videos. Because I've got new trading content coming out all the time and I don't want you to miss a thing. So the first question is, which moving average is best? This is ultra, ultra common and pretty much every trader I speak to about moving averages wants to know which is the best moving average to use. Do I use a simple moving average, exponential moving average, a weighted moving average, a hull moving average, the tema, which one is the best? And I want to tell you right up front, just like most things in trading, there is no one perfect answer for this. Every different moving average style of calculation has trade offs. They all have advantages and disadvantages. The simple moving average is simple, easy to calculate, very fast to calculate, and it's a slow, quite lagged indicator that makes it great for long term trend filters. It doesn't make it so good though for entry triggers, entry signals or exit signals. So the hull moving average is very responsive, which makes it great for entry and exit triggers, but not so great for long term trend filters. So if you're worried about should I use this moving average or that moving average, simple exponential hull, whatever, I want to suggest that you just pause and take a breath and reflect on what trading strategy you're actually using and what makes the most sense in terms of a style of moving average for that strategy and for the role that you're trying to fulfill within that strategy. Are you looking for a trend filter? If so, then a slower, more lagged indicator is probably a good one to use. If you're looking for an entry trigger and you want something quite responsive, then a faster, more responsive moving average is one that you want to use. And at the end of the day, if you don't know which one is best, the best thing that you can do is back test them all and see how they perform. One of the great things about trading systematically is that you can trade. You can test all of your different ideas, all the different moving averages, and see which one performs best for your particular trading strategy and system. So backtest them. Don't get too hung up over which one is best, because none of them are best. And no matter how many blog posts you read that explain the benefits of this one or that one, the Best thing you can do is actually test them all and then the next logical question is, okay, I know which moving average I want to use, but how many bars should I use to calculate the Moving average is 200, best is 150, best is 10 best and again, it depends on the purpose. Okay, the best thing you can do is reflect on what am I trying to achieve here with this indicator. If you're looking for a long term trend filter, you're going to use a much bigger number. If you're using for a short term entry or exit signal, you're going to use a much smaller number. And again you can back test those different values and combinations to make sure that you choose the length of moving average that is right for you, that gives you the best results for your trading strategy. So, so again, don't fall into the trap of saying, oh, I only use the 33 day moving average because that's the best one and I've seen on the charts that the price bounces off the 33 and gives me support and blah blah blah. It's complete horseshit to be honest, because every chart is different and there's no magic in the moving average. What you got to do is backtest it and find over the most number of trades, over the most amount of history, over the most number of stocks, which moving average gave the best results for your trading strategy. So don't worry about which one is best or which value to you is best. Test them and find out which one worked the most profitably for the strategy you're trading with. And the answer is going to be different for all the different markets. For the Australian market or the US market or the Hong Kong market, it's going to be different for trend following versus mean reversion versus swing trading. So you got to think about what am I trading, what is the strategy I'm using and then zero in on the type of moving average that is best for for you.

The next question that I often get is, is the moving average a good indicator? And absolutely, it's a good indicator if you use it for what it's designed for. If you use it as a trend filter, if you use it as an exit signal, if you use it carefully as an entry trigger when buying or selling a crossover, then it can be a really powerful indicator. But like all indicators, it's not perfect. So you can't just build a trading strategy on one indicator. Price crossing above a moving average and then exit when the price crosses below a moving average is not a complete strategy. You need to actually have a whole bunch of trading strategy components in addition to those moving averages. So you can make a great trading system. Using a long term moving average as an index filter, using a long term moving average as a stock filter, and then using a short term moving average as the entry trigger, and then maybe a volatility filter, a stop loss and a trailing stop to exit. You can really build a solid strategy that makes a lot of money out of that. But one indicator on its own is never enough. So use the moving averages in your trading, but don't get hung up on them too much. There's no magic in any indicator and no one indicator is enough to make you money consistently. So there's some of the most common questions about moving averages on their own. The next question is, well, which is better or which one should I use? Simple moving averages or exponential moving averages? And surely exponentials are better because they're more responsive. But again, you know, more responsive might be good for one purpose, but might not be good for another. And you need to actually back test a simple moving average and exponential moving average for the same.

Component of your trading system and decide which one is best by looking at the actual data. Okay. Anyone who claims that, you know, exponential moving averages are always best is full of crap because they're not always best. Sometimes they're good, and sometimes a simple one is good. I've got trading systems that use each each of the different types of moving averages because they're all got a different use case. And maybe, you know, I've also got, I've also got different versions of the same trading system but with different moving averages just to create some internal diversity in my trading. So I might use a long term simple moving average as an exit and a long term exponential moving average as an exit and exit. Part of my position on each one just because it creates some diversity. So different ways you can do it like that as well. You don't have to get hung up on which moving average is best or which move, which style of moving average you should use. You can use several of them. You can. And you can create some diversity in your portfolio by doing that.