Learn a Trading Strategy using Moving Average in the Stock Market | #Learn2Trade Session 12
Welcome to session 12 of Learn2Trade series. I’m simplifying the trading journey through this series and I’m accompanied by Annapurna Hello Annapurna! Hello Sir! Good So we are done with 11 classes, this is the 12th class You must have learnt something. A lot. My watchlist is getting bigger Are you sharing this video with your friends? Yes and they are loving the content I have noticed even you’ve become a celebrity. People are saying Annapurna is learning a lot We have covered the basics of trading in the last 11 classes And we’ve discussed about commodities and currencies Start tracking all. Nifty and the 5 stocks in equity, which you will tell me Gold in commodities and USDINR You need to track these on a daily basis. You can track equity in StockEdge and Currency in TradingView We will change the gear from now. I have made life very easy for you
We will now have complicated conceptual discussions When we talk about trading, we give weightage to price behaviour We give more weightage to business, when we talk about investing Since this series is Learn2Trade and I’m teaching trading, so we will talk about price behaviour There are 2 ways to identify and judge the character of the price behaviour Either you observe and judge or you judge the elements around it that influence it For example, if you want to know about a boy, either you’ll observe him for some days Their action, behaviour, nature, reactions or you take reference Do you know him? How is he? Humans being a social animal This is how we know each other Price works in the same manner in stock market. Either you observe the price or you find references for the price Technical study is a price based judgement study where you try to identify the price movement through demand and supply Which is the most commonly used study for trading. I’m repeating this again and again, I hope you’re understanding. There are other studies that you need to do after technical analysis that compliments the price study We call these technical indicators. There is price and there are a lot of indicators on top of it Which helps us in identifying the price movement. The priest example
Even you’ll become a teacher some day. Let’s talk about the priest Today we’ll talk about the priest known as Moving Average. The eldest and the most stable priest You see these 80-year old priests in the old temples who keep worshipping the god Moving Average is like that 80 year old priest Before you know about him, let’s discuss the concept of average Do you follow cricket? Not a lot. It’s good that you’re like me. You don’t care a lot about cricket
Let’s take the example of Indian Cricket Team They’ve scored a certain number of runs in the last 10 games 20-20 match of the past 10 games. Let’s open an excel There are 10 matches and we will record the scores of those games We’re talking about 20-20, they scored 160 in the 1st match Then 150, 210, 120, 150, 155, 140, 180, 210, 190. Okay? They have scored this much in the past 10 matches What will be the score in the 11th match approximately How will you answer this? Logically, I’ll take out an average to answer it Statistically, any 1 number that represents a set of numbers, can either be mean, median, or mode We had studied this with frequency table So statistically, its average should be the most likely event It’s a probability, it’s most likely It’s a possibility to be 166 But what if I tell you that Virat Kohli was not playing in the first 5 matches Virat Kohli joined in the last 5 matches Then your statistics is wrong. Possibly You might want to remove the 1st 5 matches as Virat Kohli was not playing Just take the average of the last 5 matches But the average of last 5 matches is not the correct way It’s not my problem if Virat Kohli only played the last 5 matches You might ask me to compute the exponential moving average Give more weightage to the latest matches and less weightage to the old matches It’s a weighted moving average or an exponential There is another formula for exponential moving average But conceptually it’s the same that the latest is given more weightage I’m automatically giving more weightage to the latest I’ve given 10 weightage to 190, 9 to 210, 8 to 180 How will we find the weightage? Let’s multiply both Copy and paste Let me zoom in so that it’s visible I’ll compute it’s summation and total of weightage So the answer would be this divided by this. 172 Earlier it was 166, now it’s 172 As Virat Kohli was playing in the recent matches, the score was higher We use the same concept of moving average in stock market And we try to find out the average, what price symbolizes the average price This graph shows the price movement. This is the closing price of 30 minute period I’ll change it to daily. You remember the different periods
This is Nifty’s daily chart. I’ll remove all the drawings. Right click and remove drawings This is Nifty’s daily chart. This is end of the day closing price chart I need to find the average of this. Everyday there will be an average for some periods You need 2 factors, the number of periods for average Suppose if I insert, there’s an indicator, I select it and select moving average Why moving average? As average keeps changing. It’s changing everyday
So I need an average for everyday. I’ve computed 1 day’s average in this excel But the average will change the next day on the 11th day It will change again on 12th day as it will remove the older 10th day And add the next 10th day. So the average is moving Hence it’s called moving average There are 2 types of moving average - simple and exponential Let’s select the exponential moving average that gives more weightage to the current price behaviour This is the moving average. Price and moving average are 2 separate lines
This is a 9-period moving average. We had considered 10 period to compute the moving average They have considered 9-period. We can change it Let’s change it to 21-period moving average It’s plotting the moving average of past 21 days and it’s connecting each plot by a line to form a big line Let’s add another moving average. Let’s add another exponential moving average And I’ll change it from 9 to 55 periods What is the difference between 21-period moving average and 55-period moving average? Time periods. One is considering 21 periods and the other is considering 55 periods to compute the moving average
Which of the two have a higher probability to be followed? 21. Why 21? If I see it for a long term, then the 21 has more weightage If you’re tracking the short term then, the probability of price following the 21-period is higher If you’re tracking for a long term, then the probability of price following the 55-period is higher If you track for a longer term, then the probability of price following the longer time period is higher Let’s look at a longer period. Let’s add 100 We will have to add another indicator. Let’s add 2 So 21, 100, and let’s add another 200 You can ask the logic behind 21, 55, 100, 200 21 is symbolic of number of trading days in a month. Roughly there are 21 trading days in a month. 55 is symbolic of trading days in a quarter 100 is symbolic of trading days in a half-yearly and 200 is symbolic of trading days in a year I follow these 21 and 55 as they are also fibonacci numbers Fibonacci is another concept that I will discuss later It’s the most natural number sequence.
Flower patterns or any other natural pattern in the world follow the fibonacci pattern I’ll discuss it some other time But for now park it in your mind, 21, 55, 100, 200 Can you observe that whenever nifty falls, it either takes support here And if it breaks this, then takes a support here If it’s going up continuously, it won’t be a single line No price will move in straight line The trend may be upwards, but it will keep going up and down That’s how the market moves. Exactly what’s happening. That’s how the market is moving But question is that where can it take support whenever it falls? Typically, moving averages are used as a good support in the market You can also assess an instrument’s trend for short-term, medium-term and long-term through moving average Pick up any stock. This is Nifty. State Bank of India Let’s see SBI. State Bank of India. What do you understand by this? Price is above the 21-day period, 55-day period, 100-day period, and 200-day period It means that the stock is in a positive trend in the short-term, medium term, long term and very long term This stock is positive. As long as all the 4 tenures is showing a positive trend, this stock is in positive Moving average is a trend identifier. One way to identify trend is by drawing a line That you connect few lines to identify a trend Another way is to follow moving average. If the price is moving above the moving average
It means that it’s in a positive trend. You can use moving average as a stoploss If you buy a stock, then you can create a model to buy if the price is above 100 and 200 day moving average You’ll sell it when it falls beyond the 100-day moving average period You can also buy when the price is above 55-day moving average and sell if it falls beyond 50-day moving average Should we fix a % to it? The closer it is to moving average, more favourable will be the risk-reward Smaller will be the stop loss. The further the price is from moving average, the less favourable it becomes In this case, the price is above moving average, so you buy in the short term for a small stop loss The risk reward is favourable. But the risk reward is unfavourable if you want it to hold it for a long term As your estimated loss is 40 and you don’t know the estimated returns, but the loss is almost 15% Estimated loss can be 15% and you estimated earnings can be computed by the above zone Is this strategy a different strategy that we follow in demand and supply zone? The way we form a support. You’ve asked a very good question You create multiple models in the stock market and you follow 2-3 models in sync And when you reach the price point where all the models are giving you the same sign That’s when you trade. You can’t trade on the standalone basis of demand and supply zone
The moment you add on moving average to demand zone and supply zone Then you’ve added another level of conviction tool Maybe we add another tool, that we’ll learn later and if all the tools are pointing to the same price That it will increase, then we’ll buy. It’s a filtering mechanism. The more tolls you add The more number of trades, you’ll be able to filter Doesn’t mean that we add 10 models here. The trade might not show And will add to confusion, as 4 might point you to buy, 4 might point to sell and other 2 might not give a clear picture What do you do then? There has to be optimal design of your strategy screen I have created mine. When we go to an advanced level, I’ll show which ones do I follow But demand zone and supply zone is important to judge the price behaviour, price being the god Moving average is important to talk to priest. Priest is also trying to show the direction of God We’ll discuss more indicators later. Like I’ve added RSI. We will discuss it You’ve understood the different tenure of moving average and the logic behind it I have another question. We’re monitoring this of a stock
Should we also consider moving average of a sector? You can track sector, gold, USDINR While tracking the moving average of a stock, should I also combine the moving average of a sector along with this? Once you’ve created this template. Inside the watchlist in TradingView Like I’ve created my watchlist and you have the sector watchlist in it I had told you that you can create something similar Let’s take the example of private banking sector. What do you think? Positive? The sector is positive in it. We need to find out which stock in this sector can outperform We will check the graphs of all the private sector This? It’s down now.
This? This is on it now. But we can trade in it All the moving averages are converging in it, so it can move up As the price is above all the moving average. What does this denote? As the price is above all the moving average. What does this denote?
It means that it’s standing at a same price for a long time Moving average will keep shifting. If the score is same continuously in all the matches Then all the moving averages will converge ultimately There can be a big movement from hereon That’s what’s happening in Bandhan Bank. They are all converging together Federal Bank. Positive. ICICI Bank. Positive. RBL. No
HDFC Bank? Kind of. IDFC first bank has gone up so much above moving average Axis Bank? Good. Kotak Mahindra Bank? Good If the sector is showing positivity then we need to bet on the strongest stock in it I had shown you the template while talking about sector analysis We had discussed tracking the sector leader through the sector index And forming a view whether it can outperform or not by studying the charts If the sector is becoming weak, goes beyond short term moving average.
Then you will not plan to buy the stock in this sector As the sector is showing weakish tone in the short term Let’s see which sector is showing the weakish trend Let’s see FMCG. We will not trade in it since the price is beyond moving average Do we trade by selling? Trading by shorting in the market is a different art You will not do that. We will discuss later on how to short and make money Now you’re trading by buying Ideally you shouldn’t have any FMCG stock till the price goes above the moving average Add the demand zone and supply zone study with moving average You’ll be able to add more conviction to your view on any sector or any stock I have chosen 21, 55, 100, 200. You can choose any other number You need to study which is better for you, 100, 90, 89, 88 That is your judgement you have to make How do I form that judgement? With time it will come There are some things that’s not like an ice-cream Things will come over a period of time If I want to study more deeply about these indicators, do you suggest any book that I should be studying? You can read books, there are enough books. You can search for a book on moving average
Each indicator has been very grossly covered by multiple books. You can do that I can’t get any book in my mind immediately but I can suggest you later Moving average is an indicator which is like the oldest priest in the temple The more you understand this, you’ll be able to comprehend price in a better manner There’s no harm in going deeper into this study and figuring out Maybe those books can help you understand which indicator works better But even after reading a book, you’ll have to come back to your drawing board And you need to test in each stock to see which moving average works better in this stock No book will tell you that this is the best. It will give you a framework but finally you will have to implement it. We have added this moving average in StockEdge as well We have added this moving average in StockEdge as well You’ll understand which scans are giving crossovers to moving average What do crossover mean? When 21-day moving average is going beyond the 55-day moving average The stock is turning negative in the short term. These crossovers become a very good indicator of something that is happening in the stock If you go to the moving average scans in the technical scans. Let’s go to exponential
We have a list of moving average scans and crossovers. Let’s take an example Close crossing 20-day moving average from below Stock which have crossed the 20-day moving average fro below Like it’s shown in the design as well. These are the stocks where moving averages have crossed You can see if there is any support or resistance in these stocks Can we pick up a stock? This is SAIL India. Steel Authority of India where price has crossed above 20-day moving average Let me add another moving average in it. Let’s add 50-day. 50, 55 are all same and 20, 21 is the same. There is not much difference What do you think after seeing the SAIL India graph? Positive The study which we’ve covered till now. The study of demand zone and supply zone
Let’s draw a trend line here. There’s an upward trend line and the price is above the moving average, so the stock is positive As per the study till now. We will study more indicators and create a holistic model Here you know SAIL India. SAIL is in iron and steel industry.
If the steel prices are going up worldwide, it’s good for this then We used the knowledge of commodities which adds to your conviction Trading is all about adding conviction to your trade. The more you’re convinced, the better you’ll be able to position your trade Position sizing is a concept in trading to decide how much money to put in the trade You need to decide. You’ll put in 10000 where you’re not very confident You’ll put in 50000 where you’re very confident. What does very confident mean? That multiple factors are convincing you to trade in it Commodity knowledge, moving average, demand zone, trend, are all convincing you I’m liking it so put in more money. You’ll put in less money when you’re not sure that the price will go up or not Are you getting my point? To form the judgement, you need to study these and create a model The more you’ll be convinced and put in more money You’ve understood moving average? Study more on moving average There are a lot of resources available on net, read a book and understand it deeply This is the oldest priest of the temple, he’s almost like a god Moving average was probably the first indicator created. Now it’s old
People don’t pay much attention that it deserves Atleast when we’re starting, we should track moving average Maybe with time we’ll give less attention to moving average But it’s a very important tool for the understanding of your market This was the story of moving average in my words We will record more such videos on important indicators You must have understood what I’m trying to do I’m trying to clear the key important parameters so that you can create your own holistic model It will be very easy for me to show my model to Annapurna and ask her to adopt the same But it will not benefit her in the long term as my model today might not work after 3 months And I might have to change it again. So it’s better to explain the process to Annapurna So that she can continuously improvise her model I hope you’re liking my initiative and you’re sharing it Stay tuned to my channel and adapt to this process for successful trading Bye friends