Moving Average Crossovers
Everyone has heard the saying "Let your profits run". This is one of the
basic approaches to trading. How does a trader "Let profits run" and know
when to enter and exit? The use of moving averages is the choice of many
traders.
Most of the time most stocks are in a trading range. When a trend starts,
it can last a long time producing superior profits.
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 periods) average crosses above the longer-term average
from below, this is a buy signal for the next bar’s open. When the
shorter-term average crosses below the longer-term average from above, this
is a sell signal for the next bar’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 Intuit Inc. (NASDAQ: INTU).
During the first two weeks of November, INTU was in a trading range. A
break above 20 bar highs and a Moving Average Buy signal as indicated by
the shorter moving average crossing above the longer would have a trader in
INTU in the 36 area.
INTU rose from 36 to49 before an exit signal occurred. This is a great
example of letting profits run.
INTU, after a day or two, gave a fresh new Buy signal on November 2, 1999
at the open at 51 and is rising again.
INTU closed Friday at 60.
A Sell Short as the moving averages crossed down would have resulted in a 2
point loss.
By staying with a moving average plan, a trader will always be on the
correct side of major moves in a stock.
The Sell signal loss has already been wiped out by the gain in two days in
this current Buy.
Sometimes several small losses in a row will occur, but the potential for
large gains when a trend is in place can overcome several small losses.
I would stay long INTU until an exit signal is given by the shorter moving
average crossing back below the longer moving average line.
Is it too late to get in? I don't think it is. INTU looks ready to also
break new highs.
Let your profits run and when an exit signal occurs, then and only then,
exit your trade.
