Have you ever noticed that some indicators work better on one time frame compared with another?

In fact, some indicators only work at specific time frames with certain stocks.

Why is that?

Because of the market structure.

Some stocks react to certain moving averages better when there is a strong trend— with other moving averages favoring a choppy sideways market.

That is due to the way every stock behaves.

Some stocks tend to have more day traders and others more investors.

This will impact the way a stock moves intraday compared to day-to-day.

So what’s the answer?

Well it comes down to testing various combinations mixed in with years

Luckily for you, I’ve gone through the painful trial and error process, taking a few lumps along the way.

But it was all worth it, because I can now say with confidence, I’ve found profitable setups that consistently yield positive returns.

Do you want to learn how to swing trade the markets like the pros? 

 

What are moving averages?

A moving average is a simple technical analysis tool that smooths out price data by creating a constantly updated average price.

This average is taken over a specific time period, such as 5 minute, 10 minute, 1 day, etc.

For example, a 10-period simple moving average would take the previous 10 close prices and calculate the average.

Don’t worry about the formula!

All major brokerage platforms and trading software has many built-in moving averages for you to add to your charts without reinventing the wheel.

There are many advantages to using moving averages in your trading.

Some additional forms of a moving average are: exponential, weighted, triangular, etc.

This universal indicator are popular and can be tailored to a specific asset class or time frame to fit any long-term or short-term traders.

Did you also know Moving Averages can be traded in many different ways?

Some example strategies are:

 

  • Moving average crossover
  • Trading the primary trend
  • Trading against the primary trend
  • Mean reversion

 

That list is not comprehensive but shows the different ways you can trade this simple indicator.

The power of this indicator gives the trader the utmost versatility when it comes to trading when they utilize a moving average.

Check out the Daily Profit Machine blog for even more ways to use moving averages.

In this article we are going to cover:  

 

  1. The Strategy – a basic overview
  2. Trailing stops to ride massive trends
  3. Locate perfect entry and exit signals
  4. Time your entry with technical analysis 

The Strategy

Most traders are familiar with buying Support and selling Resistance.

But that strategy is great for market reversals and finding pivots in the price.

So what do you do when the market looks like this?

 

 

 

Unfortunately you’re stuck!

The markets are trending so strong, there is no support or resistance levels you can use to trade at this point.

If the market does not retest support levels, you’ll be on the sidelines for a long time.

And even risk the market moving higher without you.

How do you trade in such a market condition?

You need to identify an area of support that is not obvious to the naked eye.

This is where traders will turn to a moving average.

Now, let’s look at the same chart with the 50 EMA added to it.

 

 

 

See the difference?

Quickly glancing at the 50-period EMA a few things will jump out at you.

Pro Tip: The price may exceed the 50 EMA. We are identifying an area of value, not a specific price level.

After the price retests the 50 EMA you can begin to notice buying pressure increases and the stock is then driven higher.

Let’s move on and see how we can use this EMA to ride massive trends in the SPY’s.

 

Trailing stops to ride massive trends

When it comes to riding trends, some traders can do it and others struggle.

Why?

Well, that is because they either keep their stop losses too tight.

Suppose you get yourself into a trade because you saw a technical pattern unfold.

But now you are left wondering, “where do I even get out of this trade?”

For example: If you’re long, maintain position as long as the stock price remains above the 50 EMA.  Only exit once it crosses below. (The opposite is true for shorts.)

 

 

 

Remember:  Riding the trends mean you can’t exit at the highs.  You must give back profits. There is no other way around it.

 

Using the 50-period EMA for High Probability Trend Reversals

If you are a reversal style trader, your entry timing is critical to your success.

There are 2 main problems with timing reversals:

 

  1. If you are too late, you may miss the chance of catching the big move early.
  2. If you are too early, you may be stopped out or step into a fake-out trap.


Now what do you do in order to time your entry so you are not too early and not too late?

One important thing to remember about the 50 EMA is that it acts as a trend filter.

Here’s how that works…

If you want to go long against a downtrend, wait for the price to close above the 50 EMA before looking to go long.

 

 

 

Pro Tip: It’s wise to place a “feeler” or smaller size trade and wait for a bullish confirmation pattern before going in full size. This helps to minimize the losses if you get caught in a fake out.

Let me ask you this…

Suppose you identified a strong trend on the 50-period EMA but missed the breakout signal.

Question: How do you place this trade?

Remember… It’s not safe to buy price when it’s over the 50-period EMA as the markets can reverse against you and leave you with a losing position.

What’s the solution?

Answer: Look for Setup Areas to give you a safe entry location!

 

How to trade the 50-period EMA using setup areas

Ever find yourself entering trades but come to realize you may have entered too late and bought the highs?

Naturally the next thing that happens is that the market pulls back,  Then before you know it you are stopped out just to see the market move higher without you.

Easily the worst feeling as a trader.

Want to know why that may happen?  This usually happens when a trader enters their position far away from the setup area.

Meaning price is “overstretched” and is ready for a pullback.

Want to know how to avoid this common mistake?

The secret is to find the setup area and trade near it instead of far away from it.

For example, the setup area is at the 50-period EMA.

This means you want to enter trades at or near the moving average in order to increase your winning rate and profit potential.

Let’s take a look at two sample charts of when to enter and when not to enter.

Here is an example of a good time to enter a long trade.

 

 

In the chart above, you can see that it is a good value to enter the SPY’s at the 50-period EMA.  This gave the best risk/reward setup capturing a good part of that entire move upward.

Here is an example of a bad time to enter a short trade trade.

 

 

In the chart above, you can see that entering a short trade that far away from the 50-period EMA was a bad idea.

Not only was the SPY’s extended far away from the EMA, the market actually rallied and continued higher.

Next let’s take a look at how to combine technical analysis with the 50-period EMA to time the markets with deadly accuracy.  

 

Using technical analysis + 50-period EMA for deadly accuracy.

Many times when a trader can combine indicators or reasons for a stock to trade in a specific direction it is said they have a strong conviction in their setups.

One way to achieve strong conviction trade setups is to combine various technical analysis techniques with one another.

A couple techniques you can use are:

 

  1. Reversal Candlestick Patterns
  2. Trendline Breakout

 

What to look for:

 

  1. Buying pressure to confirm the market is heading higher(or lower) at 50-period EMA
  2. Bullish technical pattern to confirm strength of trend


Let’s see what I mean…

 

Reversal Candlestick Pattern

Here is an example of a Bullish Engulfing candlestick pattern on the SPY’s.

 

 

In the image above you can notice on the left the Bullish Engulfing Patterns are farther away from the 50-period moving average.

They are considered weak signals because there is no confluencing indicators to support the direction of the trade.

As such, there is little price action seen at each signal.

Alternatively the Bullish Engulfing Pattern on the right is near the 50-period moving average.

This is considered a strong signal because there is a confluencing indicator that does support the direction of the trade.

As such, there is explosive price action seen at this signal.

Now what happens if you get no candlestick pattern to time your entries?

This is where the next technique will be helpful.

 

 

Trendline Breakouts


Let’s take a look at how this works.

When the price appears to be strong and a trader is not certain of when to enter the trade near the 50-period moving average, it may be helpful to look for a technical patterns to support the direction of the trend.

Here’s an example:

 

 

When the price is extended away from the 50-period moving average and starts to trend back towards it, you can draw a “mini trendline” pointing towards it.

Then the entry trigger occurs once price touches the 50-period EMA and then breaks out above the trendline.  

Final Thoughts

So here is what you learned today:

  • In a healthy trend, the 50-period moving average acts as a setup area to find profitable trading opportunities
  • You can trail a current position using a 50-period EMA as a stop loss to ride massive trends
  • If the price is extended away from the 50-period EMA, it’s too late to enter.  Wait for price to make a pullback before looking for entries.
  • Having confluencing signals from multiple technical patterns gives the trader the highest conviction trades.
  • Using technical patterns such as candlesticks and trendlines with the 50-period EMA give some of the strongest signals.

Looking for more ways to time the markets and take your trading to the next level?

Join Daily Profit Machine and receive trades and market updates right in your inbox!

 

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Author: Ben Sturgill

Ben leads two services at RagingBull. IPO Payday can help you pinpoint, position, and profit from IPOs. In Daily Profit Machine Ben guides day and swing traders to profit by trading the SPY Index. Ben hosts the RagingBull.com weekly podcast WealthWise where he shares thoughts on wealth and success with traders, businesspeople, entrepreneurs, and experts to uncover and share the wisdom needed to live a wealthy life.

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