Best Moving Average Time Frame
The moving average is an essential tool for anyone who wants to trade the stock market. No matter if you are trading stocks directly or trading options, the moving average helps identify trends and eliminate the “static” from normal second to second and minute to minute fluctuations. The one hundred day moving average and two hundred day moving average used together are invaluable for trading longer term trends. But what is the best moving average time frame for taking “sniper” shots during the trading day?
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Moving Averages for Day Trading
When we take sniper shots to profit from very short swings in the market a shorter time frame than one hundred or two hundred days is necessary. As a general rule if your trades play out over an hour or so a pair of time frames of just a few day provide the same value that the one hundred day and two hundred day moving averages do for longer term trades. For moment to moment sniper shots, one should be using moving average time frames in minutes. We commonly use a two minute time frame with our sniper shots on the S&P 500.
How to Use a Moving Average in Options Trading
When using moving averages it always works to use a longer time frame and a shorter time frame. No matter how short a time frame you are working with it is important to be aware of the longer term trend. That is the basic value of the longer time frame. Then it is important for short term trades to see how the market is moving within that longer term trend, which is what the shorter time frame does. An important aspect of using this approach is that on occasion the shorter time frame crosses over the longer time frame moving average on the trading chart. Whether the one moving average continues past the other or retreats is significant.
Golden Cross in Using Moving Averages
Stocks and indices commonly trade within trends. When they break out, that provides opportunities for profits for those who read the situation accurately. When a short term moving average moves above a longer term moving average to the upside that is called a golden cross. It generally indicates that the stock or index has broken out of its previous trading range and is heading up. Being aware of this allows the options trader to use a bullish strategy for reliable profits.
Death Cross in Using Moving Averages
When a stock or index breaks out of a trading range it is not necessarily to the upside. When the short term moving average moves below the longer term moving average on the chart and keeps going that is called a death cross. It typically indicates that the stock or index is going to keep heading down. Thus the options trader can reliably use a bearish strategy to profit as the index or stock falls. When, in either case, the short term moving average bounces back and does not break out, that also creates options trading opportunities as the market may have expected the opposite.
Pick the Moving Averages That Fit Your Approach to Trading Options
Different strokes for different folks is a way of saying that we all have our own ways to do things and our own preferences. In options trading there are folks who thrive on jumping in and out of the market, taking sniper shots, and then going away. Others prefer to take a longer-term view and trade larger movements in the market. The point is that a trader needs to choose moving averages that fit their preference in trading. A two hundred day moving average is useless for taking moment by moment sniper shots during the trading day but is invaluable for profiting from a major correction in the stock market.
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Originally published at https://topgunoptions.com on July 22, 2023.
