In the first article of this 3-part series we looked at 50-MA line breakout patterns for active equity swing traders. In this article we’ll look at how to trade using the 100-MA lines in combination with 50-MA lines on the 90-day daily candlestick chart, by identifying specific trading entry patterns to be on the lookout for.
How to Trade With 100 MA Breakouts
Often a stock will continue to break out to new highs first over the 50 MA line, then the 100 MA line, and finally over the 200 MA line, as new buyers come in. In Figure 1 [Murphy Corp. (MUR)], can see this sequence in action, as the price action first moved over the 50 MA at $48/share, then continued up over the 100 MA near $51/share, and is now testing 200 MA resistance at $54/share.
When looking for trade setups, it’s often a good idea to wait until price action has moved just above each new MA line to initiate a new (or scaled-in) trade entry. These 3 MA lines (50/100/200 simple moving average lines) also provide ideal position sizing entry triggers; eg places to add to winning trades. This is because institutional traders use these 3 key moving average lines as part of discretionary and high-frequency trading (HFT) algorithms. Using the 100 MA line as a secondary entry signal following the 50 MA cross over signal also helps traders decide where to new enter positions, if they missed an initial 50 MA breakout.
Using the 50 MA and 100 MA In Tandem for Trade Entries
Often times price action will pivot between major moving averages, using one as support and the other as resistance. We can see this pattern in action in Figure 2 [Chesapeake Energy Corp. (CHK)], in which the 50 MA line is support and the 100 MA line currently acts as resistance.
For swing traders, the strategy here is a “wait for new high breakouts” one – avoiding buying right near the 100 MA since we can anticiapte a false breakout or pivot back into the trading range. It’s a good idea to wait until price action has moved .35 cents or so above the 100 MA line, as a false breakout filter, to help potentially avoid buying a breakout that fails.
Using the 50 MA and 100 MA lines together can help traders avoid entering too soon, since price action often fluctuates between these two signal lines, before finally breakout out to new highs (or lows). Standing on the sidelines while price action pivots is wise, waiting instead for new high breakouts outside of the 100 MA line for continuation trades.
Trading Uptrend 100 MA Continuation Trades
Strong equities will maintain an uptrend, defined as higher highs and higher lows, with support bouncing off the 100 MA line. In Figure 3 [Wells Fargo Corp. (WFC)] we see this pattern, as price action finds support repeatedly off the 100 MA line.
From a trade management standpoint, ithat means that the trade should be kept open as long as the price action stays above this 100 MA line, as a key trading signal. For new entries, using new high breakouts is the correct approach, with a stop loss at just below the 100 MA line.
Using all 3 MA lines in tandem can provide a very simple visual trading approach, when traded correctly. Looking for key support and resistance triggers on the 90-day daily candlestick chart with the assistance of the 50, 100 and 200 lines can provide valuable trading signals for the astute active swing trader.
Ken Calhoun is a trading professional who has traded millions of dollars of equities since the 1990s, and is the producer of multiple award-winning trading courses and video-based training systems for active traders. He is a UCLA alumnus and is the founder of DaytradingUniversity.com, a popular online educational site for active traders.