Best Moving Average For Intraday: While trading in the stock market traders are always looking for an edge by trying out different technical tools whether it be technical indicators or price action-based patterns. One such technical indicator used by traders to have an edge over the markets is moving averages.
In this article, we are going to discuss what are moving averages, explore the different types of moving averages and their use in intraday trading, and the best moving average for intraday trading that is commonly used by individuals.
What Is A Moving Average?
Moving averages are a popular technical indicator used by traders to analyze the price movements of an asset. They are widely used in intraday trading to identify trends, support and resistance levels, and potential buy and sell signals.
The most commonly used moving averages in trading are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).
Types Of Moving Averages
In order to know which is the best moving average for intraday trading, it’s important to know the types of moving averages.
The following are the types of moving averages that are commonly used by individuals in the stock market.
1. Simple Moving Average
The first type of moving average that traders often use is the simple moving average (SMA).
The SMA is calculated by taking the sum of the closing prices of an asset over a specified number of time periods and then dividing it by that number of periods.
The SMA is a lagging indicator, which means that it is based on past price data and can be slow to react to changes in the market.
Despite this, the SMA is a reliable indicator for identifying trends and can be used to generate buy and sell signals.
2. Exponential Moving Average
Another popular moving average is the exponential moving average (EMA). The EMA is similar to the SMA, apart from the fact that it gives more weightage to recent price data.
This means that the EMA is more responsive to changes in the market and can be a better indicator of short-term trends.
However, because the EMA is more sensitive to recent price data, it can also generate more false signals and be more prone to whipsaws.
3. Weighted Moving Average
The next type of moving average is the weighted moving average (WMA). The WMA is similar to the EMA, but it gives more weight to the most recent price data.
This makes the WMA even more responsive to changes in the market and can be a useful indicator for traders looking to make quick trades.
However, the WMA is also more prone to false signals and whipsaws, making it a less reliable indicator for long-term trend analysis.
Moving Average Trading Strategies
The best way of using moving averages for intraday trading is by selecting one type of moving average with a combination of different time ranges to it.
Following is the one type of strategy that can be implemented by using moving averages.
1. 5-8-13 Moving Averages
The combination of 5, 8, and 13-period simple moving averages (SMAs) offers a perfect fit for day trading strategies.
These are Fibonacci-tuned settings that have withstood the test of time, but interpretive skills are required to use the settings appropriately.
It’s a visual process—examining relative relationships between moving averages and price—as well as moving average slopes that reflect subtle shifts in short-term momentum.
It suggests that when there is an increase in momentum, it could be a good time to buy, while a decrease in momentum could indicate it’s time to sell.
If the decrease triggers a bearish moving average rollover in multiple time frames (meaning the short-term moving averages going below long-term moving averages), this could be an opportunity for short selling, and the trader should cover their sales when the moving averages start to turn higher.
The strategy also helps identify sideways markets, indicating that there may be limited opportunities for trading during those times.
2. Long Position
Here is how you trade when you plan to take up a long position using moving averages.
a. Entry Rules
If the 5 SMA (blue, in the chart below)) crosses the 8 SMA (green) and the 13 SMA (red) upwards and they tend to form an intersection, which indicates that the price is about to take an upward spin.
Furthermore, if a bullish candle formation closes above the 5 SMA, buy positions can be initiated
b. Stop Loss for Long Entry
The stop loss for this trade would be the low of the Bullish Candle. And it can be trailed once the market moves in your favour.
c. Exit Strategy
The following conditions or rules will define the exit/take profit strategy as shown below:
If the price closes below the 5 SMA on the activity chart, it is an indication of a looming reversal and you can book your profits around that point.
4. Short Position
Here is how you trade when you plan to take up a short position using moving averages.
a. Entry Rules
If the 5 SMA (blue) crosses the 8 SMA (green) and the 13 SMA (red) downwards and forms a somewhat intersection, it indicates that the price is heading lower. Seemingly, if a bearish candle closes below the 5 SMA, initiate a sell order.
b. Stop Loss for Sell Entry
The stop loss for this trade would be the high of the Bearish Candle. And it can be trailed once the market moves in your favour.
c. Exit Strategy
If a bullish candlestick forms above the 5 SMA line, owing to the intersection of the SMA lines, an exit or take profit is advised.
The Best Moving Average For Intraday Trading?
Since traders may have various preferences and strategies, there is no one “best” moving average for intraday trading. Additionally, the time period of the moving average may vary depending on the trader’s style.
For instance, a 5-minute chart trader may choose a 20-period SMA or a 10-period EMA, whereas a 1-minute chart trader may select a 50-period SMA or a 20-period EMA.
Ultimately, the decision of which moving average to use depends on the trader’s trading strategy and personal choice.
Therefore, it is crucial to backtest and assess different moving averages to determine which one is most effective for your specific intraday trading style.
Also Read: 8 Best Books For Intraday Trading – Top Reads For Beginners!
In Closing
Moving averages are a widely used technical indicator by intraday traders. It can be very useful to identify trends and trend changes.
Although for better accuracy while trading the moving averages always combine with another technical analysis tool or price action.
In this article, we understood what moving averages are, the different types of moving averages, and the best moving average for intraday trading.
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