Lets understand the time frame based on financial cycles. Banks, Companies, Partnership firms, Financial Institutions, etc follow Yearly cycle to report their company performances. This annual cycle is further divided into 4 quarters and we get unaudited financial reports.
Based on the above time-cycles we can come to conclusion that quarterly and annually we can assess the performance of the companies.
Most of the companies year ends on 31-Mar, which is a 365 day tenure. During this 365 day period, variety of News flows in the Market in relation to the company.
News can be...
1. Company Corporate actions
2. Policy Changes by the Govt.
3. Demand/Supply issues in the Market
4. Geo-Political issues
5. and rumors floating around
For every information that comes out in the main stream Media, Social Media, has a reaction on the stock price. We can view that reaction on the chart of the stock. The best way to view this is on a Candle Stick chart.
To assess what's happening with the price, it is advisable to follow Simple Moving Average of the price. Now comes the question, what is the best Moving Average period to follow.
This is the simple Math to follow...
1 year : 365 days
Working Days : 52*5 = 260
So, we can expect 260 candles on the chart, but then, we need to include holidays too.. which in general are 10 days.
Including the holidays, the number of candles that we can see on a yearly basis is going to be around 250
Observe the charts below...
for 2021 to 2022 365 days there are 248 candles
for 2020 to 2021 365 days there are 247 candles
for 2019 to 2020 364 days there are 250 candles
Let us take the Higher number for yearly basis and start working to figure out the best time frame.
1 Year = 250 candles (Year)
1/2 year = 125 candles (Half Year)
1/4 year = 63 candles (Quarter)
Considering the above to be Ideal time frame to check price action on charts, I would include 250, 125 and 63 day moving averages on my chart. What we are trying achieve here is to match the financial reporting time frame to technical analysis.
Now, you may say, 63 days is a broader time to view, as the price fluctuates like -20 to +20% in this time frame. To limit the same let's consider a Monthly time frame too and do the math.
1 Month = 30 days
1 Month = 21 working days (assuming 4 weekends and 1 Holiday)
Now I would add one more moving average to my chart, it's 21 day moving average.
Below chart shows all the above mentioned moving averages.
DMA - Day Moving Average
- 21 DMA = Green - Exponential Moving Average
- 63 DMA = Blue - Exponential Moving Average
- 125 DMA = Orange - Simple Moving Average
- 250 DMA = Red - Simple Moving Average
Depending on your time frame to hold the stock, select the moving averages. I.e. If you want to swing trade, in which case the holding period ranges between few days to a month. then follow 21DMA.
Depending on the time frame you select the Profit/Loss also varies accordingly
21DMA - for Swing Trading, holding period less than a month
63DMA - a holding period of around a quarter or two
125DMA - holding period of more than two quarters
250DMA - holding period more than a year
You can consider a stock to be Bullish as it is above your interested moving average.