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Mahesh Moving Averages (A new way of
calculating security price)
Introduction
In
the current stock market, there is a lot of technical analysis indicator. Some
of the popular technical analysis graph which a trader user are
1) Simple Moving Averages (SMA): - this is the most basic graph a
trader use to buy/sell any security. SMA is average price of number of days
defined. Suppose we want to calculate SMA of 10 days then. The SMA will be of
current day is average closing price of current and last 9 days. One of the
most useful SMA is SMA 50, SMA 20, and SMA 200. This is widely used and
accepted by most of the traders. However, the basic problem with this moving
average is it gives equal marks to all days, which some trader thinks is
incorrect.
2) Weighted
Moving Averages
(WMA): - weighted
average is any average that has multiplying factors to give different weights
to different data points. But in technical analysis a weighted moving
average (WMA) has the specific meaning of weights which decrease
arithmetically. In an n-day WMA, the latest day has weight n, the
second latest n-1, etc, down to zero.
The
other important moving averages are Expontial Moving Averages(EMA). Triangle
Moving Averages(TMA).
But
basic problem with all these moving averages are that these moving averages
does not care about volume and historical price and volume of the security. Which
are the driving force for any security and using which we can find the average
price of the security on which it is traded most. As all we know about
New way of calculating Security Price (Mahesh Moving Averages)
We all
know about SMA, EMA, and WMA etc. Now we take an example of calculating
price-using SMA. Suppose we have 100 total share of a security on rate of 100.
Now we calculate the average price and SMA with it.
Check
this table
|
share |
Price |
new average price |
SMA(2) |
|
100 |
100 |
100 |
|
|
10 |
110 |
101 |
105.5 |
|
20 |
120 |
104.8 |
115 |
|
50 |
105 |
104.9 |
112.5 |
|
30 |
120 |
109.43 |
112.5 |
|
|
|
|
|
Here at end
column SMA is calculated and in 3rd column price is calculated using
this new way of calculating price. If you see it carefully, you will find that
3rd column is having always a price which is very near to average
price. Now let me show you why?
We have 100
securities initially with price of 100. Somebody has bought 10 securities on
price of 110 from you. So now, you own 90 securities at price of 100 and other
one has 10 securities at price of 110. So average price will be 90*100 +
10*110/100 = 101. Therefore, we can confidently say that average price 101 is
correct. Now somebody bought 20 securities on price of 120. He may have bought
all 20 from you or 10 from other person and 10 from you. However, actual number
nobody can guess. But if give equal number to everybody then he the chances of
buying from you is 90% and from other guy is 10%, which is already factored in
the average price we calculated. Therefore, we can say that he bought 20 shares
at price of 120 from you and other person at average price of 101. So new price
is going to be calculated like 101*(100
– 20) + 20*120 /100 = 104.8. see here what we are seeing is that even though
market price is 120 but average price is far
less than market price which is only 104.8. Which shows that only a
small people is buying security on high price and a lot of person is having
security on low price. So as bell curve says that most of the rates must follow
averages so either volume has to buy security on high price so that average
price goes high or price should come down.
Advantage in Using Mahesh Moving Average (MMA)
Therefore, above
example shows that how can we find average price of a security. This way of
calculation has following advantage over normal Simple Moving Average
calculation.
1) Simple
Moving Average just shows the current trend of the security. MMA has an average price of security
2) SMA
does not care about history of the security. MMA always care of history too, in
fact all prices are inbuilt has historical price with it.
3) SMA
does not care about volume. Even a low volume day price is equal to same as a
high volume day price. MMA is dependent of price and on volume. Both factor
works together to create a new price.
How to apply MMA in Security Market
To
apply AMA we can think following. Short trend, long-term trend. We can decide
following as 10 days, total average can work as a total quantity for short-term
period. 40 days can work as long term. To calculate AMA. Following formula can
be used
TAQ (Total
Average Quantity (no of days)) = Average Volume * no of days
MMA(m+1) = ((TAQ – V(m+1))*MMA(m) +
P(m+1) * V (m+1))/TAQ
Here MMA(m+1)
denotes price of MMA price at m+1 day.
V(m)
denotes volume at m day
P(m)
denotes price at m day
By this
formula next days MMA can be calculated. No of days can be 10, 15, 20 or as you
want. You can decide different no of days on different security.
After
calculating price for each day graph can be plotted on these prices.
Basic Rules for
trading using MMA
I use 10 Day MMA and 40 Day MMA for
short term and long term trading.
Here are some basic rules which
follow.
1.
If
stock’s current price is less than 10 day MMA and 40 day MMA then stock is in
bearish mode.
2.
If
stock’s current price is less than 10 day MMA and 40 day MMA and 10 day MMA is
less than 40 day MMA then stock is in extreme bearish mode.
3.
If
stock’s current price is higher than 10 day MMA and 40 day MMA and 10 day MMA
is higher than 40 day MMA then stock is in extreme bullish mode
4.
If
the % difference between current price and 10 day MMA is very high it shows
that price is high without volume so soon either a huge volume will going to
take MMA price up or price is going to down as a very lower % of public has
bought the share and most of public is having share of less price. This shows
that how price can be inflated by broker or inside trader who knows that
something going to come in future and they are just accommodating shares. This
is the key graph as no other indicator can show this relation but here in the
formula as both volume and price are playing the role it will correctly show
that if stock really worth it.
5.
If
the % difference between current price and 10 day MMA is very low it shows that
price is low without volume so soon either a huge volume will going to take MMA
price low or price is going to up as a very lower % of public has sold the
share and most of public is having share at higher price. This is very critical
as after drastically crash stock will going to have pull and at that time when
MMA and current price are in moderate range again stock will going to have
downward journey. What a trader need to do is buy when a drastically difference
has come and price has stopped going down more and sell when MMA and CMP is in
moderate range.
6.
If
a stock was less than 10 day MMA and 40 day MMA and If stock now trading greater
than 10 day MMA then it shows that stock is trying to come from bearish mode to
bullish mode if it stays above 10 day MMA then it can be a good buy for short
term till it break out 40 day MMA line and if it can break out 10 day and 40
day MMA line then the stock is in bullish mode.
7.
If
CMP curve is very vertical and 10 day MMA is not so vertical it is sign of conspiracy
means there is inside trading happening in the stock or broker is just trying
to create a hype of stock. You should take very serious consideration of those
stocks and if you really want to buy then after doing good research should
enter with a strict stop loss as you know that most of public is having stock
on very less price and if they decided to sell then price will going to be less
soon.
8.
If
both 10 day MMA and CMP curve is going upward then everybody is having a belief
that stock is good and you can enter safely till stock is in bullish mode.
9.
If
stock’s 10 day MMA is higher than 40 day MMA and suddenly CMP is less than 10
day MMA and 40 day MMA and 10 DAY MMA’s curve not having too much inclination
it shows that stock is still in bullish mode for most of public but a very
light volume has sold it on any price. It may be insider has sold it or due to
market down turn it went down but still most of public believe in this stock. You
should definitely research that stock as it is bargain buy and can consider in
buying such stocks.
10.
How
and why MMA is better and can play significant role If the % difference between
current price and 10 day MMA is very high it shows that price is high without
volume so soon either a huge volume will going to take MMA price up or price is
going to down as a very lower % of public has bought the share and most of
public is having share of less price. This shows that how price can be inflated
by broker or inside trader who knows that something going to come in future and
they are just accommodating shares. This is the key graph as no other indicator
can show this relation but here in the formula as both volume and price are
playing the role it will correctly show that if stock really worth it.
How and why MMA can play significant role
If you are a trader then if you believe in
technical analysis then you know that how many indicators are created for
getting buy/sell signal. But most of the signal is based on either volume or
CMP or day high/day low price. The stock market runs only and only on demand
supply. There are same no of shares in the market and only those shares are
bought or sold by trader every day. So if an indicator which can find out
exactly what is the average price a share holded by investor then he can play
this game very safely and can really make money in the market. The purpose of
this indicator is to find out that price but using volume, price, historical
volume, historical price which no other indicator can do. The logical way of
thinking which we use in our daily life is the key of creation of this
indicator.
This single
indicator can do all which most of indicator can’t. You can’t play your card
just by using some other indicators. But this indicator is able to get the
information which inside trader or broker tries to hide from us or by inflating
price they try to fool us. If you use this indicator carefully and make a habit
of using it before doing any long term or short term trading you can be better
off than other investor.
iGuideStocks.com Team
Email iguidestocks@gmail.com