Tag Archives: stockmarket

How to Trade Moving Averages Like a Pro

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In today’s lesson, we’re going to look at one of the more popular technical indicators, the moving average.

There are several types of moving averages which we’re going to look at here, all of which are used by traders to try and smooth out price action of a financial instrument and get a better feel for the longer term direction without all the noise that’s often associated with just looking at price.

In addition to getting a better feel for the longer term trend of a financial instrument, most averages are also used to spot potential support and resistance levels, and are often used in conjunction with one another to generate buy and sell signals.

Before we get into the details, however, let’s first have a look at the two main types of moving averages; the simple moving average and the exponential moving average. The simple moving average is the most basic type of moving average and it’s calculated by taking the past X number of points, averaging them and then plotting the resulting line on a chart.

The reason why it’s called a moving average is because as new data points become available, the average moves forward to incorporate the new data point and drops the last data point in the series.

For example, if we’re looking at a financial instrument here that has the following 10 days – let’s look at a 10 period simple moving average, 10 day moving average. How we would calculate the first data point there is we would take the sum of day one through 10, divide that by 10 and then we would get 5.2 for the first data point, using this as an example.

To get the second data point, the 10 days used would be day two through day 11 as the moving average shifts forward after the close of day 11 of trading. So we would then – the 10 days used would be day two through day 11, divide that by 10 and we get 5.4.

You don’t really need to understand all the math behind this as most charting packets, if not all charting packages, will calculate the simple moving average for you and plot it on the chart. That’s what it looks like there. You can see how the price action is smoothed out using the moving average.

The exponential moving average was basically created to do away with some of the weaknesses that traders were sighting with the simple moving average, primarily that the simple moving average gives the same weight to each data point in the series that you’re using to calculate the data points of the simple moving average.

And basically, the critics say there that the more recent data points, if we’re looking at 10 day moving average day – say nine and 10 – should be given more weight because they’re more relevant to future price action. So the exponential moving average, it was created – what it does is it gives more weight to the more recent data points and, therefore, it reacts faster to price movement.

So here’s the formula for the exponential moving average. I’m not going to go into the details on this one because it’s much more complicated. But basically, you just need to understand that the simple moving average is going to react slower than the exponential moving average because it’s giving the same weight to the first data point in the series as it does to the last where exponential moving averages are going to give more weight to the last data point in the series than they are to the first.

Here’s an example of what an exponential moving average looks like on the chart. You can’t really tell the difference there, but I’ve included both here. The black line in this case is the exponential moving average. The blue line is the simple moving average.

You can see here that the black exponential moving average line is reacting faster. As the market turns down there on the left, the black exponential moving average line turns down much quicker than the blue simple moving average line there on the right when the market turns up. Again, there you see the black exponential moving average line moving up faster than the blue simple moving average.

As far as which moving average traders use in their trading – in general, it’s going to depend on the timeframe of their trades. If a trader is looking to capture shorter term price moves, a lot of times he’ll use the exponential moving average because it’s going to react faster if he’s looking to capture longer-term price moves, he’s going to focus on the simple moving average because it’s going to generate less faults trading signals.

Lastly, they’ll also look at the financial instrument that they’re trading and the price action in relation to both the moving averages historically and incorporate their strategy into that and look at which has given better trading signals based on their strategy and the financial instrument that they’re looking to trade.

So that’s our lesson for today. In tomorrow’s lesson, we’re going to look at some different ways that traders use moving averages to trade, so we hope to see you in that lesson. As always, if you have any questions or comments, please feel free to leave them in the comment section below. And have a great day!

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The basics of trading with moving averages in two lessons for active day traders and investors in the stock market, futures market, and Forex markets.

See How to Trade Moving Averages Like a Pro Part 2 >>

How to Trade the Flag Pennant Patterns Like a Pro

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In our last lesson, we looked at strategies for trading the rising wedge and falling wedge chart patterns; two patterns which can be considered either reversal or continuation patterns, depending on how they show up on a chart.

We start our series on continuation patterns by learning about the flag and pennant patterns so that we can then look at strategies for trading each of these patterns. So let’s get started.

Flags and pennants are generally seen after a big move in one direction in a particular financial instrument and represent brief consolidations or pauses in the market before a resumption of the trend in which they occurred. The flag and pennant patterns both contain a flagpole which is represented by the sharp move upwards or downwards which sets up the consolidation. Then the flag is represented by a consolidation which can be encompassed by a rectangular formation, and a pennant is represented by a consolidation which needs to be encompassed by a triangle.

When a flag or pennant occurs in an uptrend, a break of the top resistance line can be seen or is oftentimes looked at as a resumption of the uptrend. And conversely, when a flag or pennant occurs in a downtrend, a break of the bottom support line can often be seen as a resumption of the downtrend.

So let’s look at a couple of examples here. We have a chart of Research in Motion here (RIM). Towards the right-hand side of the chart, you can see a little jump in the market there, and then the consolidation which we can encompass with two parallel lines, so that forms our flag portion of the pattern.

And then the flagpole is represented by the up move in the market, OK. so you can see the flagpole and the flag there.

Now, for flag patterns, the flag portion of the pattern can be either pointed directly to the side or slanted downward as we here; both are relevant flag patterns there and you can see the market breaking out above that and making a pretty good run after the breakout of the top of that flag pattern.

Because this flag pattern occurred in an uptrend and it was after a big jump upwards in the market, it’s known as a bull flag.

Here, we have a chart of Travel Zoo and we can see here we have our flag portion, a brief consolidation in the market after our move downward which is represented by the flagpole.

It’s basically the exact same as the bull flag example, except flipped upside down because we’re in a downtrend here, we have a big move downward, then a brief consolidation in the market before resumption of the downtrend. So you can see there.

And again here. The flag portion of the pattern can be represented by a rectangle that either points directly to the side or slightly upwards; either would be considered a valid flag pattern.

OK. So for the pennant pattern, the difference between a flag and a pennant is when a pennant is formed, the consolidation after the big move upwards or downwards narrows as it matures.

So we can see here a chart of, again, research in motion. We see a pennant formed here, and then our flagpole representing the move upward. Then we see the breakout above the top portion of the pennant.

And again here, just as with the flag, the pennant can point directly to the side or slightly downward and both would be considered valid moves there, and again here because this is an uptrend that’s represented. It’s considered a bull pennant.

OK. So here, we have a bear example. And again, just flipped upside down. Chart of Starbucks. You can see the consolidation narrowing there after the big move downward and representing the flagpole, and then you see the breakout below. OK.

You should now have a good understanding of flag and pennant patterns, and which is considered a bull flag and which is considered a bear flag, as well as with the pennants.

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In this lesson we learn about what flag and pennant patterns are in technical analysis and how to identify them on charts in the stock market, futures market, and forex market for day traders and investors.

How to Trade Triangle Chart Patterns Like a Pro Part 2

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In our last lesson, we learned about the different chart types of triangle chart patterns: the ascending triangle, descending triangle and symmetrical triangle. In today’s lesson, we’re going to learn specific strategies for trading each of these patterns, complete with entry and exit points. So let’s get started.

The direction in which the market breaks out of the triangle, and whether the market is in an uptrend or downtrend, determines whether the pattern is a continuation or a reversal pattern, and therefore whether traders are going to look to get long or go short as a result of the breakout. As with other patterns that we’ve recently learned about, when traders spot an ascending triangle, which we’re going to start with, they will look to trade the break of the upper resistance line. The target is then derived by measuring the distance between the starting high point of the ascending triangle, and the starting low point of the triangle, which is then projected upward from the break point.

The stop is then placed just below the most recent trough of the patterns. So let’s look at an example here. We’ve got our ascending triangle that we learned about in last lesson. We have the break. We then measure the distance between the high and the low of the start of the pattern, and we get five points. So that is our target for the buy entry of the trade, and then we place our stop just below the most recent trough of the pattern. OK?

The descending triangle is basically just the opposite. It’s a mirror image. We’re normally going to see these in down trends, and we’re going to look to trade, or traders are going to commonly look to trade the break of the lower support line. The target is then calculated in the same way as the ascending triangle, by measuring the distance between the high and the low points, and then projecting that distance downward from the break.

The stop is then placed just above the nearest peak. Here’s our descending triangle. You can see there, the same one from last lesson. We see the break here. We see the distance between, or measure the distance between the high and low at the start of the pattern. We get 800 points there, so that’s our target for the trade. And then we place our stop just above the most recent peak. All right.

The symmetrical triangle can be seen in either up trends, down trends, or most of the time it is commonly seen in directionless markets. As it’s an indication that neither bulls or bears are winning out. That’s why the market range contracts as they continue to fight each other.

That’s why traders are going to look to trade in the direction of the breakout. It doesn’t matter which side it breaks out on, because the break out is an indication of the side that’s won. So if it breaks to the upside, the bulls have won, if it breaks to the downside, the bears have won.

We’ve got our symmetrical triangle here that we’ve looked at from last lesson, and in this instance, it’s broken to the downside, so traders are going to look to get short there, commonly. And the target is measured in the same way as it is with the other two triangles, by getting the distance at the start. So this case, it’s 1050. Project that downward, and that’s our target for the trade.

And then the stop, because it’s broken to the upside, is placed just above the most recent peak. If that trade had broken to the upside, or if the market had broken to the upside of the symmetrical triangle there, then everything would be done in reverse. All right.

As with our other lessons, and the other patterns that we’ve looked at recently, in those volume is often looked to as a confirmation of all three of these patterns. Traders are going to like to see a decrease in volume as the pattern matures, and then an increase in volume on the break, of the break out from the triangle. So keep that in mind just as with our other strategies that we’ve looked at most recently.

All right. That’s our lesson for today, and that’s going to complete our lessons on charting patterns. In our next lesson, we’re going to start to look at a trading indicators, or technical indicators, which are going to be good for complementing a lot of the stuff that we’ve learned so far.

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The second lesson on how to identify and trade triangle chart patterns in the stock market, forex market, and futures market using technical analysis.

Trade the MACD Indicator Like a Pro Part 2

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Because the MACD indicator is a trending indicator, you’re going to want to shy away from using it when the market is in a range, even to try and predict new trends. So in addition to being able to tell whether the financial instrument that you’re analyzing is in a trend just by simply looking at the chart, you can also get a better indication of whether it’s in a trend or not and how strong that trend is by looking at the MACD indicator.

And how you tell that is if the MACD indicator is close to zero, close to the zero line, then that’s an indication of a range bound market.

So you can see here that the MACD is close to zero and there you’re in a range bound market conditions, where over here it shows the right-hand side of the chart. You’re trending up away from zero and that’s an indication of a pretty strong trend in the market there.

So once you’ve determined that the market is in a range, there’s a couple of different ways that you can trade the MACD. Which we’re going to look at first, something called the MACD divergence.

Basically, very simply, this means when the indicator, the MACD indicator, is trading in the opposite direction of the market, that’s a signal that the trend that’s in place there may be due for a reversal.

So you can see here that the market is making new highs here, but the MACD is actually trading down and that’s an indication that that trend is running out of steam. If it was a down trend there that we were looking at and the MACD was trading up, that would be an indication that the down trend was losing steam.

But here we have our uptrend and we can see here by looking at the MACD that that uptrend might be in danger. You can see the market did sell off, although it did take a little while.

Like all the other indicators that we’re going to look at, you’re going to want to use this in conjunction with some of the things that we’ve learned so far to confirm your signals there, but you can see that that diversion is there and it did call the market top there. It just took a little while.

The second way is what’s known as the MACD crossover. Very simply, when the MACD line crosses above the signal line, this is a bullish sign and some traders will trade this as a buy signal and when it crosses below the signal line, then that is a sell signal and traders will look to go short or exit their long positions on that cross.

Again, this can be traded by itself, although not recommended. It’s recommended to trade that if you’re going to trade it in line or in conjunction with some other indicators and some other of the things that we’ve learned so far, but it can also be used as additional confirmation for other things that you may be trading.

So you can see here, great buy signal. It caught the very bottom of the trend there and then great exit there. It caught the very top and got you out there. So a good indicator, but because it generates lots of signals, it’s also going to generate a lot of bad signal in addition to the good ones, so you want to have some confirmation there. So you can see the market went up there as a result of that.

All right. That’s our lesson for today. Since there’s a lot of different ways that you can trade the MACD and a lot of people have a lot of different opinions on some of the inputs for the indicator and exactly when to use it, and what markets to use it in and those types of things. You should now have a good understanding of the three main ways that traders look to trade the MACD indicator.

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The second lesson of two on how to trade the moving average convergence divergence (MACD) for day traders and investors using technical analysis in the stock market, futures market, and forex market. The link that I reference in my video is here: www.informedtrades.com

In addition to being able to tell if the stock, futures contract, or currency you are analyzing is trending or not from simply looking at its price action on the chart, you can also use the MACD indicator. Very simply if the MACD line is at or close to the zero line, this indicates that the financial instrument you are analyzing is not exhibiting strong trending characteristics, and thus should not be traded using the MACD.

Example of Trending and Non Trending Markets Once it is determined that the financial instrument you are analyzing is exhibiting trending characteristics, there are three ways that you can trade the MACD. 1. Positive and Negative Divergence 2. The MACD/Signal Line Crossover 3.

The zero line crossover Trading the MACD Divergence: Divergence occurs when the direction of the MACD is not moving in the same direction of the financial instrument you are analyzing. This can be seen as an indication that the upward or downward momentum in the market is failing. Traders will thus look to trade the reversal of the trend and consider this signal particularly strong when the market is making a new high or low and the MACD is not.