As a self-directed investor or trader, the only thing you need for your technical analysis is a price chart. Our preference is a candlestick format.
However, the addition of a few simple moving averages on a daily chart can display for us what’s happening in multiple time frames.
At times, we might want to look at those other time frames to see what the candlestick pattern looks like; however, the initial analysis can start on the daily time frame.
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If your focus was to look for only long-term opportunities, you could start with the monthly time frame. That might require long periods waiting for set ups to form, but if you’re okay with that, there’s nothing wrong with it.
For the Swing Trader, that’s looking for more opportunities to take advantage of, start with the daily time frame and then look at the higher time frames if needed.
Let’s start with the daily time frame of the stock with the three moving averages that I use. You can choose any moving averages you like, but realize that there is no perfect type of moving average or length.
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Let’s start with the daily time frame of the stock with the three moving averages that I use.
You can choose any moving averages you like, but realize that there is no perfect type of average or length.
I’m not offering the holy grail in the Chart of the Week.
What I am going to show you is a simple, intelligent way to use multiple moving averages.
Those moving averages will give us the trend direction in two other time frames and the location of the moving averages in those higher time frames. Let’s look!
First, it did not pick this chart because it is a great opportunity to buy or short the stock at this time. I chose it as an example to explain the concept of multiple moving averages. I could have picked any chart; this was at the top of a list I use.
The three moving averages on this daily chart are the 20-MA, 50-MA in the 200-MA. These are all simple moving averages, not exponential or weighted.
I use simple ones because they are the ones that I have found to be the most widely followed on stocks in the broader markets. You can use whatever you like.
On the left side of the chart, you can see that the 20-MA (blue) is above the 50-MA (green) and both are above the 200-MA (red). So, the moving averages are aligned from shorter to longer, the shorter above, the longer and pointing higher.
With that being the case, it’s obvious just based on the moving averages, the prices are going higher, and the assumption is that there likely to continue moving higher.
That’s the starting point. If the alignment was opposite, it’s going down.
In this chart of the week, the focus is on how to use these moving averages to tell us what’s going on in other time frames.
To do that we need to do a simple calculation as to what one moving average correlates to a different and short of moving average in a higher time frame.
Stepping back for a moment to say, shorter moving averages move slower than longer moving averages. So, the shorter MA will stay closer to current prices than the longer MA will when prices are trending in one direction.
The 50-MA on the left side of the chart tells us that prices are also trending higher on the weekly time frame, and above the 10-MA on the weekly time frame.
How do I know that?
There are five daily bars that makeup one weekly bar.
By multiplying the number of daily bars (5) that make a single bar in the higher time frame by the moving average used in the higher time frame, you get the correlated moving average in the shorter time frame.
5 daily bars X 10-MA on the weekly time frames = 50-MA on the daily time frame.
In the weekly chart above, you can see that the 10-MA is sloped in the same direction and approximately at the same location as the daily 50-MA.
On the daily time frame, currently, the 20 MA is under 50-MA, and both are pointing lower. This alignment and direction tell clearly and objectively that the momentum has turned lower in both time frames. Let’s continue.
The 200-MA (red line) is still below the other two moving averages, but now relatively close to the other moving averages and flat.
It should seem obvious to you that this picture is not so clear that the momentum to the downside will continue with relative ease. But why?
The 200- MA is the same as the 10-MA on the monthly time frame. So, the take away here is that the monthly time frame is still trending up.
There is no doubt that there’s been deterioration within this price chart based on the alignment and position shorter moving averages.
But the 200-MA message combined with the messages of the other two moving averages is that prices are caught between different trends or forces.
How does the monthly 10-moving average correlate to the 200-MA on the daily?
20 trading days makeup one monthly bar. 20 × 10 = 200, pretty simple, right?
The combined analysis of these three charts tells us that there is no clear opportunity here to profit on the direction of prices at this time.
However, by just looking at the daily time frame with the moving averages used, and the interpretation of them as explained would tell us the same thing.
The use of moving averages in this way is only one concept that makes up Master Trader Technical Strategies – MTS for Swing Trading.
When combining the analysis of support, resistance, volume, relative strength or weakness, candlestick patterns, the broader markets, trader psychology, position, and money management, and more - the odds of success are with you.
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On a separate note,
I will be doing a presentation next week on swing trading at the Wealth 365 Summit.
Sign up to watch the presentation here.