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 Ebay, EBAY.
EBAY is a stock that is in a longer-term downtrend.
Over the past month, EBAY has attempted several reversal rallies and each of
these rallies keeps failing.
The stock is near 52 week lows and although the stock tried to rally late
Friday, my assumption is that this rally will fail too.
By watching a stock in a downtrend for a shorting opportunity and using a
turn in the moving average can be a low risk trade.
I may also use a retracement percentage of 62% as a point to watch.
In this case, I would look for EBAY to retrace about 62% of the recent move
from 47 7/16 on the 16th to the low of 40 9/16 on the 19th. A 62%
retracement to 44 and � would be a ppoint that I would look to see the
moving average start to stop the counter trend up move and look to short on
a signal there.
If EBAY fails at 44 3/4 , I would Short Sell the stock there.
I would place my stop at 46 �.
This technique helps you to anticipate intra day, day trades and obtain
faster entry on your trades.
