How to Effectively Use Moving Averages on Daily Charts
Here are just a few simple ideas for putting moving averages to work:
1) Only consider buying a stock if it is above your moving average. By definition, if prices are below the average they are trending down.
2) When picking stocks, never buy a stock when prices are below the moving average, and never sell (short) a stock when price is above the moving average as the odds of being right are heavily against you.
3) Many traders will also use moving averages as an exit signal as they consider selling a stock that closes below the moving average.
4) Consider buying stocks as they drop near an upward sloping moving average. You'll notice when looking at charts that stocks often find support (bounce off) at moving averages. Buying on a pullback into a MA will often give you a good risk/reward entry point.
A Simple MA Crossover Strategy for Swing Traders
For this strategy we are utilizing a daily chart because these trades are meant to last a few days to a few weeks.We are not interested in what’s happening on a 5 or 30 minute time frame as its necessary to step back and look at a slightly bigger picture without all the noise found in intraday charts. The only indicators we place on the daily chart are an 8 and 21 period exponential moving average (EMA).For longs, we want to see the 8 period EMA cross above the 21 EMA. When this upward cross occurs we start looking for a trading setup to take place.The specific trade setup that we are looking for once this cross takes place is for the stock to pullback to the 8 EMA. The initial stop is the 21 EMA or 4 % of the stock price, whichever is greater. Once we are up 4% on the position we will move up stops to the 21 EMA.I will than use this EMA as a trailing stop until the target is hit or the trailing stop is hit. The target is an 8% move in the price of the stock from my entry price.Although we primarily use this tactic on specific stocks, it can be used for ETF’s very effectively.One way to slightly increase success in this setup is to trade only stocks where the 8 EMA is higher than the 21 EMA on a weekly chart for months and even years. If this setup exists on a weekly timeframe than it’s just a matter of waiting for an entry on the daily chart.
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