How to use 200 DMA (Daily Moving Average) for Option Strategy ?

WHAT IS DAILY MOVING AVERAGE?

Moving average is a statistical tool which helps in finding out the direction.

The apt definition of the Moving Average found on Wikipedia is mentioned below.

In statistics, a moving average (rolling average or running average) is a calculation to analyze data points by creating series of averages of different subsets of the full data set.

These different subsets of full data set create a line over the candlestick chart. Which can be used for analysis the trend of the market.

 

There are popularly two types of moving averages they are Simples Moving Average & Exponential Moving Average. For simple understanding, we would use simple moving average in all our references.

SMA LAGGARD INDICATOR

This indicator is a laggard indicator. It is a complementary indicator. Cannot be used individually. Simple moving average comparison with 200SMA and 50SMA are mostly used for understanding the trend. Every crossover indicates a change in the trend. But usually, the reversal in trend is delayed which is the nature of the indicator.

It can be most effectively be used when it is compared with multiple indicators and supplement other change in trend indicators.

A simple moving average can range from 15SMA to 200SMA perhaps as the number of days considered in the simple moving average the more will be the laggard. For example, the change in the trend would reflect faster in 10sma and it would reflect the last in 200sma.

CHOOSING OPTION STRATEGY

An upward moving average signifies that we are into bullish and downward moving average signifies we are into a bearish market. Likewise, a sideward moving average confirms we are into a neutral market. This helps us in selecting which is the right strategy for options trading.

One of the most crucial parts of Checklist is strategy selection and this helps us in finalising the strategy.

One can also consider the slope and crossover for entering and exiting the strategy. Crossover indicates a change in trend and this can be used as an opportunity to enter into a new strategy or change in strategy.

FINAL AUTHORITY

Perhaps in long term trending find SMA becomes a final authority. Those of us who are trading long term index options would find this to be very useful.

Although it is a laggard but when the strategy is going to last few months then it becomes very important and resourceful in decision making.

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