Sunday, January 9, 2011

Stick to Basic Moving Averages (Post by Shail)

In this series of articles we will take you through some basic technical indicators and how they have performed in last four years, during these four years we have seen Indian stock market touching all time highs and then correcting to about one third of their peak value and again gaining to late 2007 levels.

Part one of the series is dedicated to a very common yet powerful indicator class called Moving Average, which is more popularly known in two derived forms Simple moving average(SMA) and Exponential moving average(EMA) latter as the name suggests gives more weightage to recent values. Historically it has been proved that 20 days moving average, which is average of 4 weeks of price of the stock or index under study, is a significant support and resistance for market and it can be very well used to make trading decisions.

This study has been done taking into account following considerations most important of all is the trader here is a part time trader who can invest 1-2 hrs every day for trading. Investment capital is adequate to buy 2 nifty contracts (roughly `50000), and invested in current month’s nifty futures, rollovers have been done during contract expiry whenever required.

Let’s begin our study and follow two simple rules:
1. Buy nifty futures whenever spot price (Close price) moves above 20 EMA
2. Sell nifty futures whenever price (close price) drops below 20 EMA

Note: Reader can conduct similar study by taking 20SMA as well.

The charts shown below from jan-2007 to dec-2008 and jan-2009 to jan-2011 shows trading opportunity and the nifty points earned following the rules listed above. The total of these comes to approx 15020 points, considering two nifty contracts traded the total earning comes to `1502000. These returns for some may look exuberant but this is how our stock market has moved in last four year

Reader can conduct similar study on other index like bank Nifty, which will give similar results. This may look fascinating to the reader but is possible only when the indicator is followed religiously i.e. trading decisions should follow the market and not expects market to follow your trades. One more important point to notice here is to wisely close the position to get maximum return with lesser number of trades this can be achieved with the knowledge of momentum indicators which we will study in next article of this series.


  1. hello sir,

    very good post but i have some doubt, what one should do when market close one day above 20 ema and next day it moved below 20 ema. recently from 14 to 20 december and before this in october from 18 to 29 market close above/below 20 ema. please throw some light what can one do to face this type of consolidating period. and how one can fix stoploss while taking position according 20ema/sma, thank you very mutch

    sanjay kaushik

  2. Hi Sanjay, good observation,As in this study i have followed 20EMA only we can set that as stop loss for trades.If you plot graph of 5EMA you will notice more chances of earning but also more whipsaws. as 20 EMA is about 4 weeks trading activity we will get very less whipsaw moves.

  3. Hi Sir
    Could you please give us an idea about the number of whipsaws that occured during the period of study when positions based on 20 ema crossover were taken on a closing basis.

  4. Hello sir - eagerly awaiting your study of momentum oscillators.Thanks.

  5. Sir - correction - I mean momentum indicators.

  6. Hi Shaji, number of whipsaw signal depends on periods chosen for EMA like 5 day EMA will always have more whipsaws than 20 EMA and 200 will have even less whipsaws, but there is always a tradeoff if you can commit considerable time daily for trading you can use 5 EMA which will give you more trading opportunities.

  7. Thanks Mas, i will post very soon

  8. thank you shail sir for guidence

  9. Hi Sahil,

    If you are going to combine the 20 EMA rule with any other indicator, perhaps using that indicator with 10 EMA or 5 EMA may give better results...

    Just a thought...Would like to know more from you...

    Thanks for your help.

  10. @Shail ji
    Please post your article on momentum indicators