Finkarma in How To Use Moving Averages Like A Pro

FinKa₹ma
How to use Moving

averages like a pro?
Released on : 2021-09-18
You do not need more indicators. You need to

know more about the ones you are currently using.
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FinKa₹ma Though I’m more of a simple price action trader, I
find few indicators useful while doing my analysis.
Moving averages and ATR are the two indicators

that I use in my analysis.
Today we will discuss in detail how a simple

indicator like moving average can help you take
better trading decisions, and enhance your edge.
So, Mainly There are two types of moving

averages:
1) Simple moving average (SMA)
2) Exponential moving average (EMA)
The primary difference between both is their

sensitivity to the price.
SMA’s are less sensitive to price movements as

compared to the EMA’s.
There can be many ways in which you can use
FinKa₹ma moving averages, a few of them are:
1. Identifying the trend

2. Identifying the extended breakouts
3. Selling into strength
4. Trailing SL
Let’s deep dive into these.
1. Identifying the trend

We can use moving averages in identifying the
trends and the strength of those trends.
Most traders prefer to use 9,20,50,200 MA’s.
20 MA is used for identifying the short-term trend.

(1-2 months)
50 MA is used for identifying the medium-term

trend. (3-6 months)
200 MA is used for identifying the long term trend

(1 year+)
FinKa₹ma
Now, few traders like to use EMA’s and few like to

use SMA’s, though there is not as big of a
difference.
When the short, medium, and long-term trend

comes in tandem and moves in the same direction,
we get explosive moves.
FinKa₹ma
As, as you can see, when the trends align, we get

explosive moves, and Moving averages are a very
easy way to know the short, medium, and long-
term trend of a security.
So, if you see a bullish setup in a stock, check

whether it is in an uptrend or a downtrend.
Say, you see a bullish setup in a stock, but it is

below its 20 DMA, but above 50 and 200 DMA,
and you see another setup that is above all of its
moving averages, you should give priority to the
second one, as it will have ease going up.
And vice versa for the downtrend.
So, when you have identified the short, medium,
FinKa₹ma and long-term trends, now it's time to know about
the strength of those trends.
The slope of the MA’s is an easy way to know the

strength of the trend, what do I mean by strength.
Take a look at the below chart, Stock is in a strong

uptrend thus the moving average slope is also
rising, and in the second stock you can see that the
stock is in an uptrend but it is not as good as the
first one, thus its moving average slope is
somewhat flat.
When you train your eyes by looking at different

charts with moving averages, you will be able to
identify the strength of the trend by looking at the
moving average slope.
But, you have to use a consistent number of

candles in a chart, otherwise, the moving average
slope will change with changing the size of the
chart.
Now, traders get into trouble when these MA’s get
FinKa₹ma flat, once the 20 daily SMA crosses below 50 daily
SMA after a good uptrend, we can expect the trend
to go into the sideways phase, and traders might
get into a lot of whipsaws.
Now, once we see the MA’s get flat, the first and
second breakouts are most vulnerable to failures.
Basically, the stock will find it hard to get into the

trend mode again, so the first few tries to breakout
will be very volatile.
FinKa₹ma
Once the stock has spent a good amount of time

into the sideways zone, and the volatility reduces
significantly, after the first 1 to 2 Fakeouts, it's a
high chance that a trending move will come.
At this point keep a closer look at 50 Daily SMA,

most of the time the stock will give shakeouts and
rejections around that point, and the breakout of
that rejection might turn out to be an excellent
entry point.
FinKa₹ma
2. Identifying the Extended

breakouts
See, Entering a breakout doesn’t mean that you
will buy extended stocks, most traders make this
mistake and then they say breakout trading
doesn’t work.
What do I mean by extended breakouts?
Once the stock has made an impulsive move, and

is away more than 20% from the 50 DMA (in the
case of an F&O stock), and is giving a breakout at
that point.
It might not give a favorable Risk to reward ratio,
FinKa₹ma as there is a high chance of the stock to either go
into big consolidation or retrace back to the
averages.
Now, I'm not saying that every stock will retrace

back to the averages, but most will, and even if
they do not, the move on the upside will not be
easy to ride.
What I'm trying to convey is try to enter into

breakouts when the stock is near to its averages
(less than 15% away from 50 DMA in case of F&0
and less than 25-30% in case of Non- F&O scrips).
In this way, you will avoid fake out trades and will
be able to identify the right entry points.
A recent example of an Extended breakout was

BEL.
FinKa₹ma
The stock was in a good uptrend and made an

impulsive move from around 140-185 rs.
After that, we saw a short consolidation period of

around 15 days, and it again tried to break out
around 190 rs, I remember many of my friends
over Twitter who bought it that day.
But, The distance from the 50 DMA was around

13-14% at the time of Breakout, which means that
the stock was a bit extended.
Thus, if you enter at this level, your Risk is more

than your expected reward.
he stock did not give any follow-through up move
FinKa₹ma and fell right after the breakout to around 160
levels (Around 50 DMA) from 190.
And after that, the stock again resumed its

uptrend, but most traders made losses in that
trade.
Also, each scrip has different volatility, few stocks

get extended after moving 15%, few can stretch the
moves up to 40-50%, so you should also check
historical volatility levels of each stock to know
their extended levels.
Like if you look at the chart of IB real, the stock is

very volatile and can move more than 40% in
trending up move.
FinKa₹ma
So, if you get a breakout around 15-20% in this

stock, that won’t be extended, because it's less
than its historical volatility.
I hope that you got the point.
3. Selling into strength

Now, the same concept of extended stocks can be
used to sell your holdings if you are a momentum
trader.
When the stock goes 20% above the 50 DMA (F&O

scrips) it might be a good idea to sell into the
strength.
You can make different strategies to sell into
FinKa₹ma strength.
Once you identify that the stock is extended, and if

you don’t want to sell into strength but want to use
a trailing stop loss mechanism.
Say you were trailing your stop loss at every 2 ATR

moves, now as you have identified its extended,
you can change your TSL to move with every 1
ATR move.
Or if you are comfortable leaving some money on

the table, you can sell at certain percentage point
increments above the extended points.
Say 25% qty exit at 20% move away from 50 DMA,

25% qty at 25% move and rest at 30 and 35%
move.
IMO every way of selling will come with its pros

and cons, and you can choose whatever is more
suited to your strategy.
Let's again take the example of IB real about which
FinKa₹ma we talked earlier.
As we talked about earlier, this stock is a bit

volatile and trending moves can go up to 40-45%
away from 50 DMA.
Again you can see in the above chart that the stock
went 50% away from 50 DMA after the breakout
from 125 to 170 Rs, giving a good level for traders
to sell into the strength.
See, it's not that you will be able to catch the top in
a scrip, the intention for selling into strength is not
catching the top, there is no way you can catch the
FinKa₹ma top of a stock.
The intention is to keep the equity curve smooth,

with TSL methods the equity curve is a bit volatile,
though I follow both methods, you can choose
whatever is suitable to you.
4. Trailing stop loss

Moving averages can work as dynamic support and
resistance, as during trending moves stock may
not move towards horizontal support and
resistance.
So, you can use a moving average as a trailing

mechanism for your system.
Short-term moving averages will be useful for

catching small trends and longer-term averages
will be useful for catching big trends.
You can use 20, 50 SMA’s as your Trailing stop

losses.
For riding short to medium-term trends you can
FinKa₹ma use 20 DMA, you can use the candle close below
the moving average as the exit signal.
Similarly, you can use 50 DMA to ride bigger

trends.
So, if you are a beginner, this is a very good
FinKa₹ma method of trailing to start out with.
Final thoughts
Simple things work if you know how to use them
properly, and moving averages are no different.
Everyone uses them, but very few know how to use

them correctly.
My advice to you will be that don’t try to find the

best indicator, learn more and deeply about the
few which you use.
So, that's it for today from our side, we will meet

you next week, till then don’t forget to share this
article with your friends over social media.
Thanks for reading
Suggestions
FinKa₹ma
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How to use Moving

You do not need more indicators. You need to

Moving averages and ATR are the two indicators

Today we will discuss in detail how a simple

So, Mainly There are two types of moving

1) Simple moving average (SMA)

2) Exponential moving average (EMA)

The primary difference between both is their

SMA’s are less sensitive to price movements as

1. Identifying the trend

Let’s deep dive into these.

1. Identifying the trend

Most traders prefer to use 9,20,50,200 MA’s.

20 MA is used for identifying the short-term trend.

50 MA is used for identifying the medium-term

200 MA is used for identifying the long term trend

Now, few traders like to use EMA’s and few like to

When the short, medium, and long-term trend

As, as you can see, when the trends align, we get

So, if you see a bullish setup in a stock, check

Say, you see a bullish setup in a stock, but it is

And vice versa for the downtrend.

The slope of the MA’s is an easy way to know the

Take a look at the below chart, Stock is in a strong

When you train your eyes by looking at different

But, you have to use a consistent number of

Basically, the stock will find it hard to get into the

Once the stock has spent a good amount of time

At this point keep a closer look at 50 Daily SMA,

2. Identifying the Extended

What do I mean by extended breakouts?

Once the stock has made an impulsive move, and

Now, I'm not saying that every stock will retrace

What I'm trying to convey is try to enter into

A recent example of an Extended breakout was

The stock was in a good uptrend and made an

After that, we saw a short consolidation period of

But, The distance from the 50 DMA was around

Thus, if you enter at this level, your Risk is more

And after that, the stock again resumed its

Also, each scrip has different volatility, few stocks

Like if you look at the chart of IB real, the stock is

So, if you get a breakout around 15-20% in this

I hope that you got the point.

3. Selling into strength

When the stock goes 20% above the 50 DMA (F&O

Once you identify that the stock is extended, and if

Say you were trailing your stop loss at every 2 ATR

Or if you are comfortable leaving some money on

Say 25% qty exit at 20% move away from 50 DMA,

IMO every way of selling will come with its pros

As we talked about earlier, this stock is a bit

The intention is to keep the equity curve smooth,

4. Trailing stop loss

So, you can use a moving average as a trailing

Short-term moving averages will be useful for

You can use 20, 50 SMA’s as your Trailing stop

Similarly, you can use 50 DMA to ride bigger

Everyone uses them, but very few know how to use

My advice to you will be that don’t try to find the

So, that's it for today from our side, we will meet

Thanks for reading