Moving Average constitutes a very popular method of predicting the price trend or movement of an underlying holding. With its help, one can quickly understand the trend of a stock or currency.
Moving Averages smoothen out erratic movements in prices or charts. With this method, it becomes easy to see a clear picture about the behavior in the price of a security. This is a very simple and easy method of analysis and prediction. Though simple, it is extremely powerful in establishing the trend.
Short and Long Term Trend
Moving Averages are helpful in both short term and long term analysis. While as short term analysis is used to measure or smoothen short term trends, longer averages are used to measure or smoothen long term trends.
This is used mainly for taking advantage of a very short term trading opportunity. By taking quick action for either making an entry or exit, day traders are supposed to engage in scalp trading.
Scalp traders are supposed to make several trades a day within a matter of minutes. The assumption behind this is this way a scalper can make quick little profits which will tend to accumulate.
Most important features of scalp trading are getting in and getting out quickly from a stock or holding, avoiding of overnight positions, low price spreads and commissions, fast reactions and intense concentration.
Moving Averages And Scalp Trading
Scalp traders can benefit from moving averages by following very short term DMAs of 5. With a short term moving average, moving above the long term average, one can go long. However, since scalpers are mostly day traders, for them when the longer term moving average goes below the shorter term moving average, they should go short.
In order to succeed in day trading, it is necessary that traders use both longer term moving and shorter term moving averages. Two or more moving averages will have to used for the purpose of trading. One can use any type of moving average like simple, weighted and exponential.
The concept behind moving averages is quite simple. When the actual prices are rising, these will be above the average. That could indicate a buying opportunity. On the other hand when the underlying prices are below the average, that indicates falling prices and possibly a bearish market.
By constantly comparing average and underlying prices, scalping traders can take appropriate positions. They can fix several points and in between these, they can make an idea about the underlying current in the prices of a stock or currency.
Precautions For Traders
Combining moving averages with day trading involves a quick grasp of the stock prices. In order to be successful in this strategy, it is necessary that one constantly undergoes a learning and educational cycle. It also demands constant practice and trial and error.
The most important factors for this are perfect timing and attention. It should be expected that there are high costs involved in the same and this could be stressful. Traders will have to constantly obtain data, plot them on maps and graphs, understand the movement and quickly react. This could be very intense and stressful.
Traders, who can quickly read, locate breakouts and trends and take quick position, can reap good benefits.
The author has background in business, economics and finance. He is presently researching in finding ways to make money and working on the following website and blogs: