I can't live without my moving averages.
They're among my most important technical analysis tools -- especially when it comes to finding winning swing trade ideas.
My charts would feel naked without them!
Moving averages help me determine:
I rate moving averages above news, economic data, earnings, and any indicator you can think of.
If I was a starting swing trader looking to build my net worth, moving averages would be my #1 focus. Because price never lies.
And through a series of new trading case studies updated for 2024, you will learn:
Editor's Note: If you want to get Scott's favorite idea each week, make sure you go here to check out Power Plays. It's where Scott puts these moving average strategies to work to find potential winners.
Positions Disclosure: as of 2024-11-14 at 2.26.29 PM, Scott was long AAPL, AMZN, IBIT, LCID, MSOS, TSLA, AAPL calls, AMC calls, AMZN calls, ASTS calls, GLD calls, GRPN calls, NVDA calls, OKLO calls, ONON calls, RUM calls, SOXL calls, TAN calls, XBI calls; was short SPY calls, TLSA puts, TSLA calls
What Is a Moving Average? And How Are They Calculated?
The first thing you need to know is how moving averages are calculated.
A moving average is a stock's average price over a specific time period.
A daily moving average is the average of a stock's daily closing prices over a certain number of days.
(a weekly moving average would be the average of a stock's weekly closing prices over a certain number of weeks)
We'll focus on the daily time frame in this tutorial since we're talking about swing trading.
For example, the 50 day moving average on a daily chart 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.' It changes every day.
Here's a chart of Nvidia (NVDA) with its 50 day simple moving average.
The #1 Myth About Moving Averages
You often hear people say "moving averages don't work" or "everyone sees the same exact moving averages on the same charts, so they have no value!"
But here's the reality: most serious technical analysts understand that a moving average is not the same as a trading strategy or even a signal.
I don't buy and sell purely because of a moving average.
But moving averages do help me read the trend which improved my decision-making process.
They are a big piece of the puzzle. Not the entire puzzle!
What Is the Difference Between Simple and Exponential Moving Averages?
There are 2 types of moving averages -- simple and exponential.
Each is calculated in a slightly different way.
A simple moving average is just what it sounds like -- a simple average of the stock price. (the closing stock price, specifically)
An exponential moving average gives extra weight to recent prices, so it does a better job of measuring the near-term trend. It's not worth getting into the math here.
Here's Google (GOOGL) with its 50 day simple (blue) and exponential (pink) moving averages.
The Moving Averages I Use for Swing Trading
Technicians and traders tend to focus on the 10, 20, 50, and 200 day simple moving averages, which you can think of as follows:
8 day simple moving average: very short-term trend
21 day simple moving average: short term trend
50 day simple moving average: intermediate trend
200 simple moving average: long-term trend
I use a slightly different set of moving averages in my own swing trading, and in my services like Power Plays.
8 day exponential moving average: very 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 use these same colors on the charts below.
I use exponential moving averages in my swing trading because they are more sensitive to the recent price action, which gives me a better read on the short-term trend.
Going forward in this article, all moving averages will be exponential.
Is There a Difference Between an 8 and 10 Day Moving Average?
You may be asking "Scott, why do you use the 8 day moving average? Why not the 10 day?"
Most of the time, the 8 and 10 day moving averages will be very close together, as you can see in this ARM Holdings (ARM) chart:
So are they the same thing? Pretty much.
But here's what most people miss about moving averages:
It's not the exact moving averages you use that counts.
It's how you use your moving averages to find new buying opportunities, avoid trouble, and manage your risk.
When it comes to finding new swing trade ideas, I pay most attention to the 8 and 21 day exponential moving averages.
I stick with them, 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 end up with similar results -- I'd just get there in a slightly different way.
Imagine you were training for a marathon.
What matters more?
How hard you work -- or your brand of running shoes?
The Power of the 8 & 21 Day Exponential Moving Averages in Swing Trading
Traders often ask me why I talk about the 8 & 21 day exponential moving averages so much.
Whether you see me on Fox Business, Twitter/X, or the Virtual Trading Floor®, you know I never go a few days without talking about my moving averages strategies.
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 Bitcoin Turkey Trot
One of the biggest trading stories of the 2024 US Presidential Election was the surge in Bitcoin.
I'd been very bullish on Bitcoin for many reasons -- including the likelihood of Donald Trump winning the election. Plus the overall technical setup made Bitcoin feel like "the next China or Gold." Those sectors rallied big time earlier in the year.
So on October 11, 2024, I unveiled my "Bitcoin Turkey Trot" theme -- because I expected a big Bitcoin rally into Thanksgiving.
Why? Because the iShares Bitcoin Trust ETF (IBIT) surged above the 8/21 day moving averages. That was the spark that lit the flame. As you can see, IBIT rallied HARD into and after President Trump's victory:
The Bitcoin Turkey Trot was fantastic for my Power Plays service, where we were long IBIT, Microstrategy (MSTR), and Terawulf (WULF).
8 & 21 Day Moving Average Case Study II: The Carvana Short Squeeze
Do you remember when Carvana (CVNA) was supposed to go out of business because of macro headwinds and its bad balance sheet?
Well... nobody told the buyers.
It's up almost 7,000% since the 2022 lows, and it's up 355% in 2024.
Here's just a snapshot of a small part of its epic rally:
What's the lesson here?
Don't short stocks trending hard above the 8 & 21 day moving averages. It's the easiest way to blow your account up.
And if it's a heavily-shorted stock like Carvana, be extra careful. You don't want to walk into a short squeeze.
Don't short stocks trending hard above the 8 & 21 day moving averages. It's the easiest way to blow up. @reddogt3
One of the harshest realities about swing trading is that you can be 100% right on the fundamentals and still lose money.
That's why I use the moving average rules you're learning about today.
But, if you do feel compelled to short, make sure you have an exit plan in case things go against you.
Or, think about using options so you can define your risk.
8 & 21 Day Moving Average Case Study III: The Reddit (RDDT) Launchpad
Reddit (RDDT) was one of our biggest wins in Power Plays in 2024.
Look at this unmarked chart and think about what you see:
When I look at it, I see massive accumulation.
That gentle grind up along the 8 day -- never even touching the 21 day -- meant that buyers were stepping up at every turn -- even BEFORE that crazy earnings gap on the right side of the chart.
Based on what you've learned in this guide so far, you probably know that:
1) This is the kind of trend you want to buy
2) This is the kind of trend that destroys shorts
Here's how we worked it in Power Plays:
I added it on 10/3 at $67.81 thinking it was the next Doordash (DASH). DASH had been a dominant stock and the setups were similar.
Then I trimmed 1/3 at $80.18 on October 18.
And the two final pieces came off at $98 and $114 after the company made a huge earnings beat.
How I Use the 8 & 21 Day Moving Averages to Manage My Market Exposure
You just saw how a trend above the 8 & 21 day moving averages signals strength in an individual stocks.
Now you will learn how to use the 8 & 21 day moving averages to reduce your risk in front of possible market declines.
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 in what I call a Portfolio Approach.
I'll hold 10-30 long positions in individual stocks and options, with heavy exposure in tech stocks. Earlier in my career, I would hesitate to have so many names on at once, but I've improved my management skills quite a bit over the years.
When the SPY breaks the 8 & 21 day moving averages, I get in a Tactical Approach.
I start taking profits, I sell longs to which I am not committed, I put on short hedges, and I keep a close eye on the exits.
Portfolio Approach
Tactical Approach
Here's a chart of the SPY with its 8 & 21 day moving averages:
As you can see, on May 3, 2024, SPY reclaimed the 8 & 21 day moving averages with a big gap up that held.
Interestingly, on that day, the market received 2 pieces of good news.
First, Apple (AAPL) announced a major stock buyback program.
And second, we had a very strong nonfarm payrolls report.
So the market gapped up on two big pieces of good news. And that gap held.
Think about that situation.
Would it be better to be long multiple stocks showing relative strength? Or to get short the market?
Obviously, it would be smart to be long.
The lesson: if SPY gaps above the 8 & 21 day moving averages, and holds that gap, pay attention! The market could be on the verge of a powerful trend change.
But, there are times to step aside, right?
Let's extend that chart a bit:
SPY put in a very nice rally until it gapped down on July 16.
And it did not fill the gap.
Then, it broke the 8/21 day moving averages.
That's 3 signals to lighten up long exposure, or think about getting short.
How I Use the 50 Day Moving Average for Swing Trading
If a stock (or an index or ETF) loses the 8 & 21 day, I look next to the 50 day.
As I noted earlier, the 50 day moving average tells me about 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: GLD
Gold (GLD) was a major winner in 2024, taking many traders off guard with a 24% gain as of mid-November.
As you can see on the chart above, GLD went through a consolidation phase in May and June, where it essentially hugged the 50 day.
And it flat-out refused to break down below the 50 day for more than a day or two.
That told traders the intermediate trend was strong.
Then it started a fast uptrend over the 8 and 21 day into early November.
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, I avoid using it for long swing trades.
This is because names under the 200 day are technically broken, and hard to trust.
Once a stock or ETF loses the 200 day, there is no telling how far it could fall.
So I might play these names on very short time frames, but I won't stick with them unless I have a very specific, and very powerful catalyst in mind. And I'll always have an exit plan.
200 Day Moving Average Case Study: UNG
2024 was a good year for most major sector ETFs. Natural Gas (UNG) was an exception.
For over 2 years, the chart has been screaming "why bother?"
And by now you know why.
Because it was stuck far under the 200 day moving average, hitting one new low after another.
The problem with names like this is it can be tempting to try to pick bottoms.
But you never know just how low they can go.
So again, you can trade names like this short term.
But think twice about hanging on unless you have a clear catalyst. And always have an exit plan.
Thanks for Reading!
I hope this in-depth lesson gave you some valuable insights on how I view price action.
Now, if you want to get my favorite idea each week so you can see how I use these moving averages to find real-world ideas, check out my Power Plays service. It's super easy use, super inexpensive to get started.
