There is no single “best” moving average. Rather, a moving average behaves in roughly similar ways for both trading strategies. In general, there are two main differences between the two strategies. First, the difference between the two strategies lies in the number of times the moving average is used.
When using the “benchmark” option, the moving average is the only significant factor in the trade’s success. This is because any deviation from the target is considered by the market as a deviation back into the range. So, a target of $11.00 is a move back into the target zone, where the market is pricing in the fact that a trade may not get made.
On the other hand, with a “go-long” strategy, an investor should look to see if the next close over the target range would bring the stock down. This means that the move must be a very close sell off of the target range in order for the buy to be the best move for longs. If the price falls over the target range, the investor should buy, and vice versa.
Why am I so sure the “benchmark” option works best?
There are plenty of factors which could influence the price when using “go-long” versus “benchmark” or “buy and hold” tactics, but I think the biggest ones are:
1. The length of time, often more than 10 days, between the target and the end of daily trading positions.
2. The distance from the current date – or “move off” date, or “move over.” When trading, any discrepancy between the target range and the target (or move) off date is considered in a trade. This difference can make a big difference when looking at the “move off date.”
3. What percentage of the trade volume (or “volume”) has occurred since the target was last set at? This is another major factor.
4. The time frame in which you are trading. When trading is “benchmarked” or “go-long,” a time frame from the “benchmark” option is usually used to make the trade, while “buy and hold” traders often use a time frame from “buy” options.
5. The level of difficulty of the current trade. Many investors, or “longs” in particular, prefer more difficult trades because it helps identify their strengths or weaknesses. Using more difficult trades allows traders to more accurately assess their strategy.
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