The Two
Moving Averages
I use two
moving averages:
the 10 period
simple moving
average (SMA)
and the 30
period
exponential
moving average (EMA).
I like to use a
slower one and a
faster one. Why?
Because when the
faster one (10)
crosses over the
slower one (30),
it will often
signal a trend
change. Let’s
look at an
example:
You can see
in the chart
above how these
lines can help
you define
trends. On the
left side of the
chart the 10 SMA
is above the 30
EMA and the
trend is up.
The 10 SMA
crosses down
below the 30 EMA
in late February
and the trend
is down.
Then, the 10 SMA
crosses back up
through the 30
EMA in April and
the trend is up
again - and it
stays up for
several months
thereafter.
Here are the
rules:
Focus
on long
positions only
when the 10 SMA
is above the 30
EMA. Focus on
short positions
only when the 10
SMA is below the
30 EMA.
It doesn't get
any simpler than
that and it will
ALWAYS keep you
on the right
side of the
trend!
Note that
moving averages
only work well
when a stock is
trending - not
when they are in
a trading range.
When a stock (or
the market
itself) becomes
"sloppy" then
you can ignore
moving averages
- they won't
work!
Here are the
important things
to remember (for
long positions -
reverse for
short
positions.):
- The 10
SMA
must
be above the
30 EMA.
- The
must
be plenty of
space in
between the
moving
averages.
- Both
moving
averages
must
be sloping
upward.
The 200
Period Moving
Average
The 200 SMA
is used to
separate bull
territory from
bear territory.
Studies have
shown that by
focusing on long
positions above
this line and
short positions
below this line
can give you a
slight edge.
You should
add this moving
averages to
all
of your charts
in all
time frames.
Yes. weekly
charts, daily
charts, and
intraday (5 min,
60 min) charts.
The
200 SMA is the
most important
moving average
to have on a
stock chart.
You will be
surprised at how
many times a
stock will
reverse in this
area
(look at the
chart above).
Use this to
your advantage!
Also, when
writing scans
for stocks, you
can use this as
an additional
filter to find
potential long
setups that are
above this line
and potential
short setups
that are below
this line.
Support and
Resistance?
Contrary to
popular belief,
stocks do not
find support or
run into
resistance on
moving averages.
Many times you
will hear
traders say,
"Hey, look at
this stock! It
bounced
off of the 50
day moving
average!"
Wrong!
Why would a
stock suddenly
bounce off of a
line that some
trader put on a
stock chart? It
wouldn't. A
stock will only
bounce (if you
want to call it
that) off of
significant
price levels
that occurred in
the past - not a
line on a chart.
Stocks will
reverse (up or
down) at price
levels that are
in close
proximity
to popular
moving averages
but they do not
reverse at the
line itself.
So, suppose
you are looking
at a chart and
you see the
stock pulling
back to, let's
say, the 200
period moving
average.
Look at the
price levels
on the chart
that proved to
be significant
support or
resistance areas
in the past.
Those are the
areas where the
stock will
likely reverse.
