Moving Average Trend Trading
Some traders use moving averages as potential entry and exit points for day trading. Many stocks will start an upside or downside trend respecting their moving averages in 1-minute and 5-minute charts as type of a moving support or resistance line. Traders can benefit from this behavior and ride the trend along moving average (on top of moving average for going long or below moving average for short selling).
I have been asked why moving averages are becoming support or resistance, and the answer is because many traders are looking at these lines and making decisions based on them. Therefore, they have a self-fulfilling prophecy effect. There is no fundamental reason behind moving averages being a support or resistance line.
I use 9 and 20 exponential moving averages (EMA) and 50 and 200 simple moving averages (SMA). I won’t go into the details of what moving averages are and the differences between simple and exponential in order to keep this book short. You can, however, do a Google search and find information about these moving averages or you can of course contact me directly through www.Vancouver-Traders.com with any questions you may have. Your charting software will haves most of the moving averages built in. They are ready to be used and there is no need to change the default setting in them.
Let’s take a look at the chart below for NUGT to see how you could trade based on 9 EMA in a 1-minute chart.
Example of a Moving Average Trend Strategy on NUGT.
As you can see, at 15:06 pm I noticed NUGT has formed a Bull Flag. I saw that a consolidation period was happening on top of 9 EMA. As soon as I saw that 9 EMA was holding as the support, I jumped on the trade and rode the trend until the price broke the moving average at 15:21 pm. I’ve marked my entry and exit points on the chart.
Let’s take a look at another example, Celgene Corporation (CELG), on June 16, 2016. In the chart below, you will see how you can trade based on 20 EMA in a 1-minute chart. I marked my entry and exit points on the chart.
Example of a Moving Average Trend Strategy on CELG.
Another example is EXAS on July 28, 2016 with 9 EMA.
Example of a Moving Average Trend Strategy on EXAS.
To summarize my trading strategy for Moving Average Trend Trading:
- When I am monitoring a stock and notice a trend is respecting moving average, I consider trend trading. I quickly look at the previous days’ trading data to see if the stock is responding to these moving averages in a 1-minute or 5-minute chart. I have 9 and 20 EMA and 50 and 200 SMA.
- Once I learn which moving average is more suitable to the behavior of the trade, I buy the stock after confirmation of moving averages as a support, and I buy as close as possible to the moving average line (in order to have a small stop). My stop will usually be 5 cents below the break of moving average line.
- I ride the trend until the break of moving average.
- I never use trailing stops and I constantly monitor the trend with my eyes.
- If the stock is moving really high away from the moving average, I take some profit, usually at half-position. I do not always wait until the break of moving average for my exit.
I personally don’t trade very often based on moving averages. I look at them to see potential levels of support or resistance, but I rarely make any trend trade based upon their trend because, in a trend trade strategy, you are usually exposed in the market for a considerable time. Some trend trades can last as long as several hours and that is too long for my personality.
Another major problem I have with Moving Average Trending is that you don’t know in the stock you want to trade which moving average is accurately acting at a support or resistance level. In the examples above, if I changed my moving average from 9 to 12, or to 15, or to any other number, then it won’t act as a nice clean support.
I use 9 and 20 EMA on my default charts, but I know not everyone does. Some traders are using 11 and 21 EMA. That in the end is a significant problem with Moving Average Trading. You don’t know which moving average is best for a stock and you obviously do not have enough time to test them all out during the trading day.
I recommend using either:
9, 20 EMA and 50 and 200 SMA or:
11, 21 EMA and 50 and 200 SMA
Having said that, Moving Average Trend Strategy is an excellent strategy for beginners, because it usually does not require a very fast decision making process and trade execution. In addition, stop loss and entry points can be clearly recognized from the moving average on the charts.
As I discussed, strategies depend on your account size, personality, psychology of trading and risk tolerance, as well as on your software and the tools and brokers that you have. The combination of all of these factors have led me to be a VWAP trader and support or resistance trader, something I will explain in the next section. However, I want to emphasize that trade strategies are not something that you can imitate just from reading a book, speaking with a mentor, or attending a class. You have to slowly and methodically develop your preferred method and then stick with it. There is nothing wrong with any strategy if it works for you. There is no good and bad in any of these strategies; it truly is a matter of personal choice.
Now let me explain what my favorite trading strategies are.
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