For those who are new to simply stocks and options, Welcome! and existing friends, welcome back.
I will like you to read the post to the end because the previous trading sessions of trading reflects unstable times and I will like to give you confidence as you trade in these times.
Let me jump into moving averages (MA) in this time of uncertainty. Markets are up 500 points, down 500 points, up 1000 points and down 1000 points. For many trader who have subscribed to Simply Stocks and Options you know we do not trade fundamentals, we trade with technical analysis which is a time tested trend principle method of trading the market.
In times of turbulence, the technical analysis tools tell us what to do, we are ahead of the volatility by using the tools especially in these times.
Moving Averages is the trend’s best friend forever as they are used to smooth out the trend and make it easier to see the big picture by making bare the predominant and current trend. The moving average can be used as a short cut in identifying the trend.
You can set up your moving averages from the indicator settings in the same way as I have done above.
As the trend is moving up and down the line smoothens the trend by moving behind to smooth out the process. Few traders use solely the moving averages to trade.
The above are called Exponential Moving Averages (EMA) which I usually use in trading and set at the 10, 20, and 50 period EMA to identify short or intermediate term trends.
Some traders use the Simple Moving Averages (SMA) but they can be useful in long term trends and do not react as quick as the Exponential Moving Averages. All three EMAs can be used at the same time on the chart and used together.
The signs predicted by the EMAs are different hence why it is used together.
How to Use EMAs
Let me illustrate here that EMAs can be used for trend direction, as a Buy or Sell signal and as a support and Resistance which we discussed in a previous post and can be found here. It is as simple as mentioned.
For the trend direction, simply ask yourself if you are above or below the moving averages.
When the candlesticks are above the moving averages it means the trade is in a bullish trend (area of chart painted green), when the candlesticks are below the moving averages it means the trade is in a bearish trend (area of the chart painted red) and when the candlesticks are stuck in the middle or on the moving averages it is a neutral trade or called a sideways market (areas painted white).
When the moving averages crosses it depicts an opportunity, ideally all 3 moving averages crossing tells the trend is reversing and this is either a buy or sell signal.
A moving average crossing upwards signals a bullish trend and when moving averages cross downwards signals a bearish trend.
It is useful for a support and resistance when the candlestick trades up the moving averages is a resistance and down to moving averages is a support.
The EMAs can be used to trade fully without any other tool.
Examples of Moving Averages
APPLE – AAPL
See the Apple stock, at point number 1, moving averages crosses the 50 period downwards and the trend becomes bearish. If you trade the trend by going bearish to exit at point number 2 when the lines cross again, see the trend goes bullish and you can ride it all the way up to point number 3 in October 2018.
Point number 3 the line cross and the trend goes bearish which indicates the currently bearish trend. See it now? Let us do one more example for clarity.
AMAZON – AMZN
Point number 1 on the Amazon chart depicts candlesticks on the moving averages and you just got it right it is a sideways or neutral market. I clearly would not trade in such trends or preferably you can use Stochastic indicators.
At point number 2 notice the moving averages crossing upwards, that is a bullish trend reversal, notice the bullish run from point 2 to point 3 and point 4. At point number 4, the moving averages cross downwards which is also a trend reversal and currently AMZN is trading bearish since moving averages cross at point 4.
Do you want to check out more examples? Can you to check out the two stocks as a personal practise sessions; SPDR S&P 500 Trust ETF – SPY and BOEING – BA.
You can use the charting tool for free here to practise. Drop me a comment below to help me know how you get on.
KITS is my acronym for Keep it Trade Simple. I have seen many Traders paste too many confusing indicators on the chart, loads of lines and it all becomes confusing. When you Keep it Trade Simple you cannot get it massively wrong.
How do you KITS? Play all your trade using a trade journal with a simple process I have used, simply analyse your trade, then chose a strategy, write down the plan such as your entry point, stop loss and a target; then measure against your plan – did you follow the plan or did your emotions get in the way and do I make any adjustment.
Let me send you my KITS trade journal. All you need to do is drop me a comment and subscribe, I will send you my KITS trade journal.
I know the trading sessions have not been looking good and you may have lost some money but remember, they are all opportunities to enter into the market awaiting the next bullish or bearish run.
Trade the trend because the best days are still ahead
Let us stay calm and be prepared. Don’t forget to drop me a comment and subscribe for my KITS trade journal.
See you soon.