Perfect Moving Averages

If you are using a moving average for your trading strategy, you know how difficult it can be to figure out the right settings for your moving average. Should you use more periods to generate fewer false signals, or should you use fewer periods to create signals closer to the moment of price change?

Some traders claim to have found the perfect answer to this dilemma and propagate the use of a certain number of periods as the „one size fits all“ solution to all trading problems related to moving averages. This article will analyze these claims.

Why perfect numbers exist

Some traders claim that prices move in cycles. They say every market movement is a result of these cycles overlapping each other. By this logic, a trader which is able to figure out all cycles in the market could predict all market movements accurately for years to come. While even the most convinced cyclic analysts admit this is impossible, they use cycles for some aspects of their trading.

According to cyclic analyst, each asset has a dominant cycle at any given time. If you can find this dominant cycle, you can adjust your moving average accordingly and will get the perfect numbers you need for your trading.

Critics, on the other hand, claim that cycles do exist, but there are too many cycles which overlap and make it impossible to determine which cycle is dominating the market at any given time. Statistical data does not confirm cycles, and cycles always seem to be more apparent in hind sight. Their usefulness to trading is therefore at least questionable.

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Using cycles for trading

Still, whether cycles do actually exist is not the important question at hand. Even if cycles are made up, if a large enough number of traders believes in them, they can be used to generate trading opportunities.

A few numbers are especially popular with cyclic traders: There is the combination of 28 and 14 days, or the combination of 5, 10, and 20 days. While you should not put blind faith in these numbers as settings for your moving average, they are indeed a good point to start your quest for your personal perfect numbers that work with your strategy.

From these examples, especially the 20-period moving average stands out. Whether it is just a coincidence, the concerted action of cyclic traders, or the real existence of cycles, when an asset is in a trend, the 20-period moving average often works well for most strategies related to moving averages. Depending on which site of the current price the moving average is moving, it often creates a support or a resistance level. If you do not chose to trade the 20-period moving average, it can make sense to at least visualize it in your chart to get a feeling for what other traders are thinking currently.

Still, never value any claims of perfect numbers or perfect settings for moving averages too highly. After all, the sheer amount of different perfect numbers for moving averages should be enough to put these claims into an at least questionable light.

More about Moving Averages

If you want to learn more about the use of moving averages in binary options, we recommend you to read the following:

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