The Ultimate Guide to Moving Averages: Trend Analysis the Pro’s Way – T3 Live
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The Ultimate Guide to Moving Averages: Trend Analysis the Pro’s Way

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Moving averages have been a mainstay in my toolkit since I began my professional trading career in 1999.

Moving averages help me determine:

  • How aggressive to be with my portfolio
  • Which stocks I want to be long or short
  • Just how strong the current market trend is
  • What news matters, and what doesn't

In terms of importance, I rate moving averages above news, economic data, earnings, and just about any indicator you can think of.

If I was a beginning trader looking to build my net worth, moving averages would be my #1 focus.

And through a series of helpful case studies, you're about to learn:

  • What a moving average Is
  • How moving averages are calculated
  • The specific moving averages I use, and how I interpret them
  • The biggest myth of moving averages

Editor's Note: If you'd like a downloadable and printable PDF version of this article, please check out The Ultimate Guide to Moving Averages.

Click here to learn more ==>

What Is a Moving Average? How Are They Calculated?

Let's talk about how a moving average is calculated.

A moving average is a stock's average price over a certain time period.

We're going to focus on the daily time frame this article. 

A daily moving average is the average of a stock's daily closing prices over a specified number of days.

(a weekly moving average would be the average of a stock's weekly closing prices over a specified number of weeks)

For example, the 50 day moving average is a stock's average closing price for the last 50 days.

Every day, the newest closing price in the moving average replaces the oldest, which is why we call it 'moving' -- a moving average change every day.

Here's a simple chart of Apple (AAPL) with its 50 day moving average.

The Biggest Myth About Moving Averages

You may hear people say things like "moving averages don't work" or "everyone sees the same moving averages, so they have no value"

But here's the reality: most serious technician understand that a moving average is not the same as a trading strategy or even signal. 

I don't buy and sell purely because of a moving average.

But moving averages do help me make decisions. They're one piece of the puzzle.

That's why they're so valuable to me.

Simple vs. Exponential Moving Averages

There are 2 types of moving averages -- simple and exponential.

They are calculated in slightly different ways.

A simple moving average is a straight average of the stock price.

An exponential moving average gives recent prices a bigger weight, so it does a better job of measuring recent momentum.

Here's Nvidia (NVDA) with its 50 day simple (blue) and exponential (pink) moving averages.

You can see they're pretty close, but the exponential (pink) is a bit closer to the current price.

The Moving Averages I Use

Traditionally, technicians and traders have focused on the 10, 20, 50, and 200 day simple moving averages.

You can think of them in these terms:

10 day simple moving average: very short-term trend

20 day simple moving average: short term trend

50 day simple moving average: intermediate trend

200 day simple moving average: long-term trend

I use a slightly different set of moving averages in my own trading, and in Redler All-Access.

8 day exponential moving averagevery short-term trend

21 day exponential moving average: short term trend

50 day exponential moving average: intermediate trend

200 exponential moving average: long-term trend

(I matched the colors on the names with their colors in the charts below.)

I use exponential moving averages because they are more sensitive to the recent action, and give me a slightly better read on the near-term trend.

Going forward in this article, all moving averages are exponential.

Is There a REALLY Difference Between an 8 and 10 Day Moving Average?

You may be asking "why the 8 day? Why not the 10 day?"

In most cases, they're not terribly different, as you can see on this SPY chart:

But here's what most people miss about moving averages: 

It's not the exact moving averages you use that counts.

What matters is how well you use those moving averages to help you manage risk.

As I'll soon discuss, I pay most attention to the 8 and 21 day exponential moving averages. 

I stick with those because my brain is trained to judge the action based on those time frames.

If I was using, say, the 10 and 20 day simple moving averages, I'd probably end up with the same results -- I'd just get there in a slightly different way.

The Power of the 8 & 21 Day Moving Averages

Traders often ask me why I talk about the 8 & 21 day exponential moving averages so much. 

Whether you see me on CNBC, Twitter, or the Virtual Trading Floor®, odds are you'll hear me me talking about them.

It's because these moving averages are the most accurate short-term road map I've found.

And I value moving average more than any other analysis I see out there.

8 & 21 Day Moving Average Case Study I: The 'Overvalued' Beyond Meat (BYD)

In mid-2019, Beyond Meat (BYND) was one of the hottest stocks in the market, and we focused on it heavily in Redler All-Access.

This stock was very controversial, and I bet you saw plenty of headlines like this:

But let's look at the chart.

What were the 8 & 21 day moving averages telling us?

They were telling us the trend was strong.

As you can see, it never even touched the 21 day!

And most of the time, it was above the 8 day.

This is a perfect example of a powerful trend.

Even if you're not long a stock like this, resist the urge to short because you think it went too far.

Because if a stock goes from $46 to $200 while staying above the 8 & 21 day moving averages, there's no telling how high it can go.

A stock you think is overvalued can easily become more overvalued. So I never, ever short a stock that shows momentum above the 8 & 21 day moving averages.

NEVER short a stock that shows momentum above the 8 & 21 day moving averages - @reddogt3

Click to Tweet This Tip from Scott Redler!

8 & 21 Day Moving Average Case Study II: Facebook (FB) a.k.a. the King of Bad News

In mid-2019, Facebook (FB) came under heavy fire for a host of controversies including antitrust scrutiny, calls for breakups, privacy issues, and even worries over its Libra crypto currency.

This is a classic example of why I value price action more than news:

On June 14, Facebook gapped above the 8 & 21 day.

The next day, it gapped up a second time, and held the gap.

At that point, Facebook shorts should have asked themselves "am I right about the news, but wrong on the stock?"

And this shows you why moving averages are so important -- they can tell you when your opinion is costing you money!

8 & 21 Day Moving Average Case Study III: The SPY Post-Brexit Classic

Let's rewind the clock back to the Brexit in June 2016.

I've shown this case studies in several webinars and training events, and I bet I'll be teaching it 10 years from now.

The day before the Brexit vote, the SPY hit $210.87.

And the day after the 'shocking' vote, it hit $188.65.

If you were focused on headlines like this, you were probably feeling pretty scared:

​But let's extend the chart to see what actually happened.

As you can see, SPY started bouncing, and on June 30, 2016, it reclaimed the 8 & 21 day moving averages:

That's a statement of strength, not weakness.

Why?

Because it meant momentum was shifting back to the upside. That was telling you the news was either priced in, or not as bad as expected.

And in this case, SPY briefly retested the 8 & 21 day moving averages before rallying above $219:

​Everyone had an opinion over what the Brexit would mean.

But as you just saw in the charts, our opinions didn't matter as much as the market's.

When SPY reclaimed the 8 & 21 day moving averages with authority, it screamed that the bulls were retaking control.

And that's an important lesson for you: when a stock/index/ETF reclaims the 8 & 21 day moving averages with authority, PAY ATTENTION!

When a stock reclaims the 8 & 21 day MA's with authority, PAY ATTENTION!  - @reddogt3

Click to Tweet This Tip from Scott Redler!

How I Use the 8 & 21 Day Moving Averages to Manage My Market Exposure

You just saw how a big break above the 8 & 21 day moving averages can signal higher prices.

Now let me show you how I use the 8 & 21 day moving averages to get less aggressive, or even bearish.

I have two primary approaches to the market: a Portfolio Approach and a Tactical Approach

When the SPY is trending above the 8 & 21 day moving averages, I am typically in what I call a Portfolio Approach. I'll usually have 4-12 long positions in individual individual stocks showing relative strength. Occasionally, I'll also hold call options.

When the SPY breaks the 8 & 21 day moving averages, I typically get in a Tactical Approach.

I start taking profits, especially with weaker names, and I may even put on a short SPY hedges.

Portfolio Approach

  • SPY trending above the 8/21/50/200 day moving averages
  • 4-12 long positions on with plenty of tech exposure
  • No short hedge unless we get extended

Tactical Approach

  • SPY breaks the 8 & 21 day moving averages
  • Start taking profits in leftover longs and weaker-looking names, start looking for potential shorts
  • Hedge with SPY short

Here's a chart of the SPY with its 8 & 21 day moving averages:

As you can see, it reclaimed the 8 & 21 day moving averages with force on June 5/6.

After that happened, would it be better to be long multiple stocks? Or short the market?

Obviously, it was time to be long.

The lesson: if SPY breaks above the 8 & 21 day moving averages, pay attention! The market could be on the verge of a powerful trend change.

How I Use the 50 Day Moving Average

If a stock (or an index or ETF) loses the 8 & 21 day, I look next to the 50 day.  

As I noted before, I use the 50 day average to judge the intermediate trend.

In other words, I watch to see if a stock is heading down to no man's land around the 200 day (bad), or rebounding back up to test the 8 & 21 day (good). 

As I noted before, I use the 50 day average to judge the intermediate trend.

50 Day Moving Average Case Study: SNAP

Snap (SNAP), maker of the popular Snapchat app, was one of my best-performing picks in my 2019 Market Outlook report. 

Let's use it to learn about the 50 day moving average.

Check out this chart of the 2019 action:

Snap took off like a rocket in January and had a beautiful rally into May. 

It then lost the 8 & 21 day moving averages, which put the 50 day in focus.

Then, it had 3 separate tests of the 50 day, reclaiming it each time.

And then in early June, it broke back above the 8 & 21 day with authority -- exactly when SPY also broke above the 8 & 21 day moving averages. 

That shows you that when a stock successfully holds the 50 day, it could get back in gear to reclaim the 8 & 21 day.

How I Use the 200 Day Moving Average

The 200 day moving average also plays an important role in my stock selection process.

If a stock is below the 200 day moving average, I'll only use it for short-term scalp trades on both the long and short sides.

I try to avoid these types of names for long swing trades.

This is because stocks under the 200 day are technically broken, and hard to trust.

Once a stock loses the 200 day, there is no telling how far it could fall.

200 Day Moving Average Case Study: TSLA

Let's take a look at Tesla (TSLA) from May 2018 to July 2019.

I circled each break under the  200 day. In mid-to-late 2018, each break of the 200 day resulted in a lower low.

And then in early 2019, we finally saw a real failure, and Tesla dropped by $100+.

I avoid stocks like this for swing trades because they're not worth my time. There are so many stocks that are easier to trade, so why bother? 

200 Day Moving Average Case Study: GLD

If a stock/index/ETF spends a lot of time under the 200 day and then reclaims it, I also watch for a potential trend change to the upside.

Now let's look at GLD, which came out of a lont-term downtrend in late 2018/early 2019.

Thanks for Reading!

I hope this in-depth lesson gave you some valuable insights on how I view price action.

Now I have a challenge for you: take a major event like a Fed decision, election results, military conflict, or major downturn, and examine the 8, 21, 50, and 200 day moving averages both before and after the event.  

This will teach you to start focusing on levels instead of getting locked into opinions.

It feels good to be right about the news. But it feels even better to make money because you were right about price.

Editor's Note: If you'd like a downloadable and printable PDF version of this article, please check out The Ultimate Guide to Moving Averages.

Click here to learn more ==>