Hi,
can anyone tell me why 20 50, and 200 moving averages are used, why these specific numbers are chosen, or what are they based on?.
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These are just common and convenient periods for traders, chart designers, analysts and market commentators. Like using miles in the UK and kilometres in France.
The actual period you select should relate to your strategy. So if your strategy involves looking for a short-term pattern that will last maximum of 3 days, using the 200MA might not be relevant at all to the quality of your selections and the profitability of your trades.
Prob because it’s been the most popular ones that it became kind of like an industry standard? But aside from that, I think if you consider the time that those averages factor in, that tells you how useful it can be for whatever you’re trying to do.
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Certainly, the 50SMA price breach, or price trend at 50% of last high or low, or trade entry and exits, and S/L & TPs at 50 are the green flag for US traders. So beware, as you’ll join a queue of traders at that level, just right for institutional S/L hunters.
The moving average is calculated by adding a stock’s prices over a certain period and dividing the sum by the total number of periods. For example, a trader wants to calculate the SMA for stock ABC by looking at the high of the day over five periods. For the past five days, the highs of the day were $25.40, $25.90.
Some people feel that Fibonacci proportions have some relevance to the way the rhythms of nature influence the markets. (I am one of those)
21 and 55 are both Fibonacci. As others have said - the 20 and 50 are commonly used and therefore tehy tend to influence the matkets more than ledder used ones - they are also close enough the the Fibonacci numbers I stated above, to be usable in that respect - although you can try changing the settings to those I gave and see if you think they show better responses.
The 200 is close to the number of trading days in a year and I have heard it postulated that it is used for that reason, but in any case taht is so common it is what EVERYBODY is looking at and it would be plain silly not to !
moving averages do not in any way predict the future.
moving averages are a memory of the past.
every basic indicator that i have ever looked at is based upon moving averages, which means that the basic indicators do not predict the future but instead are simply a memory of the past.
moving averages are a mathematical delusion.
moving averages are fools gold.
What Babypips says about leading and lagging indicators:
Babypips school of Pipsology lessons – Elementary school.
Indicators.
Let’s discuss some concepts first. There are two types of indicators: leading and lagging .
A leading indicator gives a signal before the new trend or reversal occurs.
Lagging indicators work well when prices move in relatively long trends
When you use leading indicators, you will experience a lot of fakeouts . Leading indicators are notorious for giving bogus signals which could “mislead” you.
Lagging indicators only give signals after the price change is clearly forming a trend. The downside is that you’d be a little late in entering a position.
Lagging indicators don’t work well in sideways markets.
Do you know what does though? Leading indicators!
Yup, leading indicators perform best in sideways, “ranging” markets.
Oscillators can warn of the end of a trend. The Williams %R, Stochastic, Parabolic SAR, and Relative Strength Index (RSI) are all oscillators.
Each of these indicators is designed to signal a possible trend reversal, where the previous trend has run its course and the price is ready to change direction .
MACD and Moving Averages are lagging. Can be used in combination to reduce the number of fakeout signals.
Chart patterns
Head and Shoulders and Inverse Head and Shoulders
Rising and Falling Wedges
Bullish and Bearish Rectangles
Bearish and Bullish Pennants
Triangles (Symmetrical, Ascending, and Descending)
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Aye the problem with indicators and charts that they cause learners to concentrate on the past.
Nothing wrong with the past except that it’s over and done with - thing is it’s the right side of the chart is where we need to focus on .
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They are part of the self fulfilling nature of technical analysis. They are popular, so more people use them, so price reacts from them, so more people notice them, so they become more popular, and on, and on