I was listening to the speaker in a seminar years ago and wondered, what is the 20-period moving average. So, I searched for more information from online, and here is what I found.
The 20-period Moving Average (MA) is a trading indicator for trading divergence. Divergence occurs when the price is above 200 Moving Average, yet below 20 the Simple Moving Average, which usually triggers a buy signal.
This differs from the traditional moving average crossover trading systems, which are lagging indicators of market price action.
20 Moving Average Crossing 200 Moving Average
Bullish and Bearish Cross or any crossover signal rarely produce accurate and reliable trading signals when using moving average indicators.
According to Angel Broking, almost all moving averages lag in price. (source)
They even recommend using another type of indicator, which is the Hull moving average indicator.
However, this post is about the 20 period moving average, and how traders can use its advantages.
20 Moving Average
20 period moving is popular among day traders because it is not too short and not too long. The indicator heels the price of the stock.
The frequent use of this indicator is buying or selling the stock when the price crosses above or below the 20 periods moving average.
Have you heard that 20MA is helpful in short-term trading? If not, then you need to continue reading. Most traders buy when the price is above MA20 and sell below it.
However, we will not copy other traders, but we will talk about divergence trading later on. Also, this advance strategy has an edge because traders rarely use it.
200 Moving Average: Long term moving average
Traders have successfully used the 200-period MA (slower moving average indicator) to filter uptrend or downtrend stocks. Also, if more stocks are above this indicator, it means the market is healthy.
Here at Johndeoresearch.com, we only recommend buying stocks above 200 MA regardless of if you’re using shorter or long-term trading.
The long-term trend may help traders avoid trading against the direction of the market.
However, a price crossover with this indicator may predict a change or start of a new market direction, for example, a downtrend which may last for years.
Note on short selling:
Data has shown that shorting stocks is not profitable in the long run at least as what we have known.
Short selling is a high-risk trading activity with unlimited losses.
Divergence of 20 MA and 200 MA
- Occurs when an indicator and the price of an asset are heading in opposite directions. (source)
- One technical indicator signals an uptrend while the other shows a downtrend.
Well, we can use divergence to our advantage. Also, traders use this signal in mean reversion strategies.
On the chart, the trading setup below is an example of divergence trading.
We buy when the price of the stock has crossed below the 20-period moving average and the closing prices have stayed above the 200-period MA.
The trend direction is up, which favors long entries. Traders should buy only on a bullish trend.
Divergence in the two indicators has created the buy signal. The short-term dip within the uptrend is the right spot/level to buy the stock.
Try to backtest with Amibroker the University of stocks to see the performance of this method. Let me know what you’ll find.
If you invest the time in back-testing this strategy, you’ll see that it is profitable.
Exit strategy or stop loss
You can experiment with different exit strategies by using Amibroker. It all depends upon your preference.
If you are day trading, you’ve got to exit before or at the close.
Well, I hope you learned something today.
Can you suggest more strategies about the 20-period Moving Average? Let me know.
Did you learn something from our post, “20 Moving Average?” Please share it.
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