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How to Use the 20 and 200 Day Moving Averages

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If you hate Moving Averages, odds are you don’t know how to use them. Combined with knowledge of price-action, they are an invaluable tool. In this article, I’ll show you how to harness the power of the 20 and 200 Day Moving Averages.

What are Moving Averages?

A moving average is a stock's average price over a certain time period. That time period can be anything from minutes to days to weeks to months to quarters to even years.

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

So if I saw the 20 day moving averages, I am talking about the stock's average closing price over the last 20 days.

Moving Averages are directional guides that speed up the technical analysis of trends.

If the moving average is pointing up, you know the stock is bullish. If it’s pointing down, you know the stock is bearish. 

They are superior tools in uptrends and downtrends, and their importance in sideways trends is greatly minimized. In this article, I’ll show you how to use them with sideways trends.

When using moving averages, the color should be consistent across multiple timeframes. The type of moving average doesn’t matter, but it should be the same on all time frames. 

How to use the 20 Day Moving Average

The 20 day moving average is one of my powerful tools.

When Stocks are about to transition up, the 20 day Moving Average with start to hug price and curve up. That is your indication that the stock is about tot transition. 

So, even if the trend is sideways, keeping an eye on the moving average will tell you when the sideways trend is breaking. 

In these examples, the moving averages alert you to the higher-low, which indicates that the stock is about to breakout. 

I call this “the halt”: when the stock stops criss-crossing the MA and begins to respect it.

The MA applies to every timeframe the same way.

The only exception is the daily, which has gaps. 

While the moving average is going through price, don’t touch the stock. When it starts to point up, it’s indicating that the stock is going higher.

What Does the Direction of the 20 Day Moving Average Mean?

  • A rising 20 Day Moving Average represents positive market action or strength.
  • A falling 20 Day Moving Average represents negative market action or weakness.
  • During a strong uptrend, retractments tend to halt at or near the rising 20 day Moving Average.
  • During a strong downtrend, rallies tend to halt at or near the declining 20 Day Moving Average.
  • Following penetrations of the 20 Day Moving Average, pullbacks to the broken 20MA become very likely.

In this example, we see the stock bouncing off of the 20MA on the uptrend. When the retracement breaks the 20, the next several retracements also break it. The 20MA is no longer relevant as the stock goes sideways. This is anindication that the trend is over. 

What does the Slope or Angle of the 20 Day Moving Average mean?

The slope or angle of the 20MA is indicative of the strength or weakness of the underlying stock!

A 45 degree angle is ideal.

  • Steeper than 45 indicates that the trend is not sustainable and will soon run out of fuel.
  • Shallower than 45 degrees indicates that the stock is weak and lacks momentum.

Here is an example of an ideal Rising 20MA slope.

Here is an example of an ideal Declining 20MA slope.

Here, the MA starts at a 45 degree angle, but becomes steeper (unsustainable), and tops out:

How to Play the Trend of the 20 Day Moving Average

The odds are much higher in the direction of the MA.

  • The 20MA must be going from bottom left corner to upper right corner (when playing long)
  • Price is at or near the 20ma, not far away from it (not extended)
  • The 20MA is not crisscrossing price
  • The 200MA must be below price, not above it.
  • The correct entry is almost always at/near the rising 20MA or the declining 20MA

However, we do not enter because price is near the 20MA. We must have a tradable pattern

Other Ways to use the 20 Day Moving Average

  1. Expedite the scanning process: For bullish stocks, look for a rising 20 MA. A flat 20 MA indicates the stock is currently momentumless. 
  2. Determine the stock’s extension: If a stock is tracking just above the MA, the stock is not extended. If the distance between the stock price and 20 MA grows rapidly, the stock becomes extended. 
  3. Locate support/resistance: In an uptrend, support is almost always found at or near the MA. 
  4. Determine if there is a price divergence: if a stock price shoots up above the MA while the MA continues at the same rate, the stock will most likely pullback to the 20 MA.
  5. Anticipate reversals: when a stock is in an uptrend, price respects the 20 MAs. You can spot reversals before they even happen.
  6. Anticipate a rise in volatility: If using two MAs (a faster and slower), cross overs between the two MAs indicate volatility. 
  7. Calculate risk to reward: when the 20 Day MA is your target, you can calculate the risk 
  8. Determine Relative Strength to Relative Weakness: If a stock is trading above the 20 MA, it is showing Relative Strength. If it’s trading below the 20 MA, it’s showing Relative Weakness.

How to use the 200 Day Moving Average

While the 20MA is most powerful when it’s trending, the 200MA is strongest when it’s flat.

Think of the 200MA as a floor to stocks above it (support) and a ceiling to stocks below it (resistance): a level floor is always preferable to a slanted one.

  • In general, stocks trading above the 200MA are being accumulated. 
  • Stocks below the 200MA are going through their distribution phase
  • As such, do not short stocks above their 200MA on that timeframe
  • Similarly, do not buy stocks currently below the 200MA

Support: When price is declining towards the 200MA

Resistance: When price is rallying up towards the 200MA

This is especially true if the stock was extended. Even more if the stock was extended and put in 3+ consecutive green or red bars to the 200MA.

Here, you see the 200 MA (the red line) acting as support after the stock gaps up and as resistance after the stock gaps down:

How to Use the 200 Day Moving Average as a Gap Strategy

  • Buy at the open stocks gapping up just above a flat 200MA on daily chart, regardless of the quality of the gap
  • Short at the open stocks gapping down just under a flat 200MA on daily, regardless of the quality of the gap
  • Wait for a pullback to the 200MA before buying stocks that gap well above a f200MA
  • Wait for a counter-rally to the 200MA before shorting stocks that gap well below a f200MA

How to Use the 200 Day Moving Average as a Breakout Strategy

-Look to buy stocks in an uptrend that base at or near the 200MA as soon as the rising 20MA catches up to price

-Alternatively, look to short stocks in a downtrend that base at or near the 200MA as soon as the declining 20MA catches up

This is a very effective for long term trading.

Thank You For Reading!

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