The purpose of this Market Call section is to
educate readers in technical analysis patterns and indicators. As with all investment
information, you need to research information and consult your financial advisor before
initiating any strategies that are contained in Market Call.
Also, you must realize that as with all trading strategies,
opinions can change quickly depending on market conditions and developments.
This column tries to present historical examples, potential set
ups, and examples of entry and exit strategies.
Moving Average Crossovers
Moving averages are one of the oldest and most popular technical analysis
tools.
A moving average is the average price of a security at a given time. When
calculating a moving average, you specify the time span to calculate the
average price for X number of periods. For example, 20 periods. These
periods may be 5 minute bars, 15 minute bars, 60 minute or daily bars).
The classic interpretation of a moving average is to use it to observe
changes in prices. Investors typically buy when a security's price rises
above its moving average and sell when the price falls below its moving
average.
The moving average crossover method calculates two moving averages, each
based on a different number of periods of trading data. When the
shorter-term (fewer days) average crosses above the longer-term average
from below, this is a buy signal for tomorrow's open. When the shorter-term
average crosses below the longer-term average from above, this is a sell
signal for tomorrow's open.
The current charts we are using calculate a 5-period and a 20-period
exponential MA of the closing prices on 60 minute bars. If the 5-period MA
crosses above (becomes greater than) the 20-period MA, you would buy the
next bars opening because the system is saying that an uptrend has begun.
You maintain this long position as long as the 5-period MA is greater than
the 20-period MA. When the 5-period MA crosses below the 20-period MA, the
trend is now down and you would liquidate your long position and establish
a new short position on the next bars open.
Let’s look at VoiceStream Wireless Corp. (NASDAQ: VSTR).
One of the characteristics of the moving average crossover methods is that
it can always keep you in the market either long or short.
During sideways markets, trading moving average crossovers can be
frustrating. However, when the stock is trending, it is one of the greatest
feelings to be a moving average crossover trade.
Moving averages is not a high percentage trading method, however the
average winning trade will exceed the average losing trade by double,
triple or even more.
VSTR is a good example of trading moving average crossovers and always
staying in the market either long or short.
Profit in Points
Short Jan 3 at 128. Cover and go long on Jan 10 at 120 + 5 points
Long Jan 10 at 120. Cover and Short Jan 11 at 113 � - 6 �
Short Jan 11 at 113 �. Cover and go long on Jan 13 at 110 3/8. + 2 1/8
Long Jan 13 at 110 3/8. Exit and Short Jan 25 128 11/16 + 18 5/16
Short Jan 25 128 11/16. Exit and long Jan 26 133 7/8. - 5 3/16
Long Jan 26 133 7/8. Exit and Short Jan 27 128 � - 5 5/8
Average Winning trade � in points 11 5/8
Average Losing Trade � in points 5 5/8
I like that ratio!
I would still be Short VSTR.
Stay with the trend and apply a plan to your trading!
