Question

Justify how moving averages can be used to generate trading signals. include examples to support your answer.

Answer 1

Ans:

Moving Average Crossover is very common strategy. Here, 2 or more moving averages are used as a crossover. Say we are using 3 moving averages 8, 13, 21 days moving averages. When 8 period moving averages as a fast moving average crossover 13 and 21 period moving averages from below then buy signal is generated. When 8 period moving average crossover 13 and 21 from above it will be sell signal. Here we are compairing last 13 days and 21 days price with last 8 days. If 8 days period price is more than other periods then 8 day moving average will be cross it from below and vice versa. This can also be used with 2 moving averages but then its efficiency will be much less than 3 moving averages.

Moving average pullback strategy can be used along with 2 moving averages. In this strategy 2 moving averages are used and after moving average crossover we wait for price to pullback near fast moving average then we initiate buy position and vice versa. Example- 2 moving averages are 5 days moving average and 10 days moving average. First we wait for crossover of 5 days moving average with 10 days moving average from below then wait for pullback of price near 5 period moving average. Then it create buy signal.

Using single moving average with price. Here when price cross a single moving average from below then buy signal and when price cross moving average from above it generates sell signal. Example- when 10 days moving average is crossed from above then sell signal generates and vice versa.It's just comparing current price with last 10 days average.

Using Moving average as band where moving average of 8 period moving average used as high and low. When price moves above high line then it buy signal and when goes below low it is sell signal.

MACD or moving average convergence and divergence is consist of MACD line and Signal line. MACD line is difference 2 moving average of 12 and 26 days moving average and signal line is 9 days EMA. When signal line cross from below the MACD line is buy signal and vice versa. Here last 9 days exponential average price is compared with 12 and 26 days price difference. When 9 days price more, then crossover happens and buy signal is generated. Same for sell signal just opposite of buy signal.