Best moving average in swing trading

Swing trading and technical indicators

In the world of swing trading, navigating the complex landscape of technical indicators requires using a collection of tools, each designed to uncover opportunities and execute trades with precision.

However, in the middle of various indicators, the moving average emerges as a strong partner, a beacon of clarity in the midst of market chaos. From the simplicity of the SMA (simple moving average) to the agility of the EMA (exponential moving average), the realm of moving averages is rich and diverse.

But here's the twist – it's not just the type of moving average you choose, but also the temporal lens through which you view it. Do you gaze through the 5-day moving average, the 20-day moving average, or perhaps the grandiloquent 200-day moving average? The number of choices, while empowering, can, at times, lead to a mental dilemma where you become unable to make a decision.

In response to the resounding chorus of queries from our trading community, we embark on a quest to answer a quintessential question: What is the best moving average for swing trading?

It’s good to remember that each of these moving averages serves its purpose within your arsenal, like different instruments in a symphony. Yet, some wield a sharper edge than others, offering profound insights that resonate powerfully with swing trading.

If pressed to nominate a singular champion for this demanding discipline, our recommendation would be the 200-day simple or exponential moving average. We’ll explain the rationale behind this choice in due course. First, let's embark on a journey through the very essence of moving averages – why they matter, why they are indispensable, and how to harness their potential in crafting your trading strategy.

What is a Moving Average?

In financial analysis, Moving Averages are a fundamental tool utilised to gain insights into the trajectory of asset prices. At its core, a Moving Average is a mathematical computation that involves calculating the mean price of a trading product over a designated time frame, subsequently presenting this data in a visual format on a chart.

To illustrate, consider the case of a 200-day Moving Average (MA). Here, the closing prices of the assets from the previous 200 days are combined and their average is calculated.

The resulting figure serves as a valuable indicator, offering a comprehensive perspective on the prevailing trend in a particular product's performance. This analytical technique is invaluable for investors and analysts seeking to grasp the underlying dynamics of financial markets.

Types of moving averages

Delving into the realm of moving averages, it becomes apparent that there exists a diverse array of these analytical tools, each offering distinct perspectives on price trends. Let’s explore these various types, starting with the ubiquitous Simple Moving Average (SMA).

• SMA (Simple Moving Average)

The bedrock of moving averages, the Simple Moving Average (SMA), represents the most elementary iteration of this analytical approach. As previously mentioned, it operates by straightforwardly averaging closing prices over a specified number of past trading days. For example, a 50-day SMA entails calculating the mean of the closing prices recorded over the preceding 50 days. The resultant figure provides a clear insight into the historical performance of an asset.

• EMA (Exponential Moving Average)

In contrast to the SMA, the Exponential Moving Average (EMA) introduces an element of dynamism by assigning greater significance to recent price developments. The EMA formula incorporates a multiplier that leads to more substantial weight being accorded to the latest prices, rendering the EMA highly responsive to recent fluctuations.

• SMMA (Smoothed Moving Average)

A derivative of the EMA, the Smoothed Moving Average (SMMA) adopts a refined approach by reducing the multiplier's impact. This attenuation renders the SMMA less susceptible to abrupt price changes in comparison to the EMA, albeit more attuned to recent trends than the conventional SMA.

• LWMA (Linear Weighted Moving Average)

Finally, the Linear Weighted Moving Average (LWMA) parallels the EMA's emphasis on recent price data but employs a different weighting methodology. Within the LWMA framework, the weight attributed to each closing price undergoes a linear reduction, in contrast to the exponential decline characteristic of EMAs.

This spectrum of moving averages furnishes traders and analysts with a versatile toolkit to analyse market trends, each variant offering its own nuanced perspective on price dynamics.

Optimal moving averages for swing trading

The selection of the best moving average for swing trading is far from a one-size-fits-all proposition; rather, it hinges upon the nuanced interplay of individual trading objectives and one's threshold for risk.

However, discerning traders have discerned a proclivity for a particular moving average type - the exponential moving average (EMA) - for its responsiveness to recent market fluctuations, outshining the simple moving average (SMA) in this regard.

In addition, traders must grapple with the temporal dimension of moving averages. Longer moving averages reveal the broader strokes of the trend while muting the noise of market volatility, making it easier to understand the overall direction more clearly. In contrast, shorter moving averages react quickly to the latest price movements, which is an advantage when quick trades or exits are in demand. In the realm of swing trading, the consensus leans toward intermediate time frames, especially the 200-day moving average.

The MA200, or the 200-day Moving Average, serves a dual role as a trend identifier and a level of support and resistance in trading. When the price trades above the MA200, it suggests a bullish trend may be in place. Conversely, when the price trades below the MA200, it indicates the potential for a bearish trend.

Ultimately, it is the trader's responsibility to experiment, refine and tailor moving averages to accommodate their distinctive trading methods. As the saying goes, the most profound insights in trading come from first-hand experience. Start your swing trading journey with a modest account or even try in simulated trading with virtual capital to find the moving averages that complement your unique strategy.