How To Swing Trade with Major Moving Averages: Part I

Ken Calhoun |

Institutional traders who move markets often use the simple 50, 100 and 200 Moving Average lines as key decision support tools.  In this series of articles we’ll look at how to potentially capitalize on easy-to-spot patterns that these powerful charts generate.

Before the Trade: Using 50 MA Resistance Signals

When looking for stocks that have been sold down and are starting to pivot back to the long side, looking at the nearest moving average line on a 90-day candle chart often provides signals to use.  In Figure 1 [Verifone Systems Inc. (PAY)], you can see that it has been in an uptrend for several weeks and is finally testing the nearest major moving average line, in this case the 50 simple MA (red) line.

Figure1 Verifone Systems Inc. PAY

When looking to initiate a trade, it’s often a good idea to look for potential entries in the region at least .50 to $1 above the red 50 MA line.  In this case, that would be over $37/share (with a $1 stop loss).  The pattern to look for is when a stock has been sold down sharply starts to recover and breaks above the 50 MA line as resistance.

During the Trade: Once it Breaks over the 50 MA Line

Once in a swing trade, and the price has gotten just over the 50 MA line, the trade setup has been confirmed and it’s time to look at scaling in, by adding more size to a winning trade.  In Figure 2 [Prudential Financial Inc. (PRU)], you can see that the most recent daily candle has in fact gotten just over the red 50 MA line, near 48.

Figure2 Prudential Financial Inc. PRU

An initial stop loss would be placed just under 48, and a scale-in entry (to add more size to the initial trade), placed at just over 50, for a secondary entry.   The maximum profit target would be set at the nearest next MA line, in this case the 100 MA line up near $54/share, for the exit.

Looking for these “breakouts over the nearest MA line” is a useful visual scanning process, because it shows when volume and price are finally getting back into a new trading range that’s worth considering for a new trade entry.  They’re also particularly useful for trade management and discipline, because they clearly show “when the trade is right” versus when it’s time to exit the position.

After the Trade: When The Trend is Broken Using the 50 MA Line

Finally, once a trading position has been built, it’s important to know when to start scaling back out of the trade (or exiting the position entirely).  In Figure 3 [Expedia (EXPE)], you can see that it lost the 50 MA line support at just under $46 share, for an exit signal.  Entering on the breakout signals that are provided, then exiting again once the trend has been broken, is a particularly useful professional trading approach that can be learned, with the help of these useful three MA indicators.

Because these 3 MA lines are used so frequently by major institutional traders, they are well worth learning how to use, especially for active swing traders (in which positions are held from overnight up to several weeks). In the next article in this series, we’ll look at how to combine signals from the 50, 100 and 200 MA lines for even better signal strength, when managing entries and exits.

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.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
EXPE Expedia Inc. 121.00 -1.01 -0.83 1,467,838
VLN:CA Velan Inc. Subordinate Voting Shares 17.25 0.00 0.00 0
PAY Verifone Systems Inc. 15.52 -0.74 -4.55 5,339,647
PRU Prudential Financial Inc. 101.73 -0.74 -0.72 1,954,567

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