When markets are volatile, using moving average “pivot entries” can help active traders stay on the right side of their trades. In this article, you’ll learn how to find technical breakout entries when price action pivots to the upside over a 50-period moving average (MA) line on a 90-day candlestick chart.
When To Enter Trades That Recover
Although breakout momentum trades are generally the best trades to enter (buying new highs in strong uptrends), pivot setups also work out well when markets are volatile. A favorite professional trading approach you may want to consider is to enter when a sold-off stock chart recovers to move above the 50 moving average line.
In Figure 1, WGL Holdings Inc. (WGL) you can see a pivot long in late September, once price action broke over the red 50-period moving average line, near $55/share.Subsequent buying moved price all the way up to $60/share in the week that followed the breakout.
There’s several techniques that you can use when swing trading 50 MA pivots:
a) Use high volume to confirm an entry: it’s often smart to wait until the day or two after a MA pivot, to check if volume is higher than average, which is preferable. In Figure 1, you can see that September 18th was a high-volume day, which then led to an upside breakout.
b) Anticipate and avoid false breakouts: Expect price to chop around and consolidate at the 50MA pivot region. It’s a good idea to wait until price has moved a point ($1) above the red 50MA prior to entering. In Figure 1 this would yield an entry price of $56/share, which would keep you out of false breakout and consolidation areas.
c) Tighten stops as price gets to resistance levels: In pivot recovery charts, scaling out to take profits near prior resistance areas, such as 90-day highs, can provide an effective strategy.
d) Use scaling & position sizing: In the author’s trading experience, it’s often wise to book profits early by selling partial open trade positions near prior resistance areas, in anticipation of a drop in share price. Adding incrementally to winning trades (every $2 or so ) and scaling back out once profit targets are hit is a smart trade management strategy.
Trade Planning with Moving Averages
Since institutional traders use 50-, 100- and 200-period simple moving average lines, it’s a smart idea to also plot and follow price action using these signals. They can be a significant help in planning your trades as you look for key support and resistance areas, as well as in helping you manage your trading entries and exits.
Recommended resource: For more on using this and other trading strategies, see the author’s complimentary Saturday “Trading Week Ahead’ webinar events at http://TradeMastery.com/free/
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 founder of TradeMastery.com and StockTradingSuccess.com (with Steve Nison), popular online educational sites that reach tens of thousands of active traders worldwide.
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