How to Trade Using Moving Average Crossovers
Vital to becoming a successful Trader
1. Patience.
2. Discipline.
3. Money/risk management.
4. A Trading system that is proven to be successful.
5. Extreme Focus
6. Decisive action
The purpose of this Blog is to document a system that has proven to be an extremely
accurate and consistent method of generating buy and sell signals for a wide variety of
market trading vehicles including stocks, futures, forex and commodities on various
time frames.
The system described entails the use of moving average crossovers on bar
charts with various time periods to confirm buy/sell entries.
Every trader must develop their own trading system that they are comfortable
with. It must be proven to be successful thru many situations.
Eminis wiill be used as the trading vehicle to illustrate the trading system.
What You Need
To Start
1. A complete knowledge of the stock market terms and methods of operation..
Investopedia is a great resource of
information for traders. Must read: The Disciplined Trader
2. An account with a broker who offers trading capability in a wide variety
of instruments.. Some recommendations Interactive Brokers, Tradestation,
Ameritrade.
3. Access to a chart service that is flexible and programmable. I use Sierra Charts but
Tradestation and Ameritrade's TOS provide excellent charting systems.
MA
Crossovers
Price action is the only true real time trading signal. Sustained price movement
or trend is measured by moving averages or the change of price over a period of time.
Recognizing trend changes are the most important factor when deciding when to
enter a trade.
A MA Crossover is a method of generating buy and sell signals based trend changes or a
short term moving average crossing a longer term moving average. Different MAs
can be used depending on individual preference. I prefer 5 and 10 moving averages
in generating crossovers in the short term and confirmations of longer terms including
10/20, and 20/50.
Good explanation here of what a moving average is:
http://www.investopedia.com/terms/m/movingaverage.asp
Overbought and oversold conditions can exist for extended periods or time and patience
is required before entering a trade.
STOCHASTICS
Crossovers
Stocastics Crossovers are more important than MA Crossovers in that they demostrate a decrease in buying or selling volume.
The Stocastics Crossover is shown on the bottom of the charts displayed. The red arrows indicate buying pressure has decreased. It may pick up too so two red arrows are better than on and three even better.
The green arrows indicate a return to buying volume. You should see a small green candle on the charts often followed by more.
The MA cross is a further confirmation of buying.
Stochastics divergence is defined as price making higher high or lower low while stochastics
do not, is also a sign of a trend change about to occur. http://www.investopedia.com/articles/trading/08/price-momentum.asp
Candle
Charts
I tend to use full candle charts most recently switching from Renko back to candle as I find the tails they provide a good indicator of direction change
Renko
Charts
Renko Bar
charts is the charting system I found to help vizualize trend changes and eliminate
mixed signals that occur in short terms. Of course other type of charts also work just
fine with MA crossovers Simple candlesticks are fine. Some prefer Heikin-ashi
or line charts also work. Each trader has their own preferences.
The renko bar size must be adjusted to the instrument you are trading and the time
frame you trade. Longer time frames give a better perspective of trend and help
eliminate chop periods when markets move up and down in consolidated range.
In trading ES and NQ emini, I use various renko bar charts, using various time
periods 5, 15, 60 min with .5 renko bars that can be adjusted.
There are many ways of setting up charts:
http://www.investopedia.com/university/technical/techanalysis7.asp
http://www.investopedia.com/articles/trading/10/range-bar-charts-different-view.asp#axzz1YycxyN4W
http://www.greattradingsystems.com/ninja-trader/1616/
It is best to experiment and change settings to arrive at what it best for you.
Most traders add a momenturm
indicator to their charts . This indicator provides indications of
overbought/oversold conditions. Divergence
in the indicator gives clues on when reversals are about to occur.
RSI, 3/10, CCI, MACD and various stochastics are several momenturm
indicators. I recently began using SMI, the Stocastic Momentum Indicator as my
choice. Each trader has their own preference.
What are EMinis
Good explanation here: http://www.eminimethods.com/emini_basics.html
On any given day as many as 50,000 accounts may be trading ES although 30 of them
account for 50% of trading volume often through automatic trading programs.
http://people.stern.nyu.edu/jhasbrou/SternMicroMtg/SternMicroMtg2013/Papers/ExploratoryTrdng.pdf
http://www.automatedtrader.net/home.xhtm
http://quantstart.com/articles/How-to-Identify-Algorithmic-Trading-Strategies
Margin requirements for various futures products
IB Margin
Sierra Charts allows you to sets alerts for various studies. I have audio alerts
that indicate when ES and NQ moving averages crossover, both up and down. I have
these alerts set for various time periods.
This trading system can be used for a variety of trading vehicles including index
futures, forex, stocks, and commodities. One must determine the size of the
ticks used that is most suitable for the particular vehicle, its price and the time
period you wish to trade.
Risk management is key to limiting losses in any vehicle and small consistent profits
are preferable to trying to hit home runs
Charts
The following are Sierra Charts showing system generated buy/sell signals.
The charts includes the Stocastic Momentum Index (one of many momentum indicators), and moving average crossovers. Trades can be entered off of five, fifteen, thirty minute charts or any time frame depending on your preference.
For daytrading I find 30 minute charts give a good overall view of intraday trends by helping eliminate chop zones
The white arrows or red/green background color changes indicate a moving average has crossed. Various moving averages can be used. Short term, 5/10, 10/20 are good settings,
Most
Certified Technical Analysts, major institutions and hedge funds use tthe 50/200 dma cross to determine major long
term trend changes.
When the momentum indicator crosses down from overbought or up from oversold, reversals
occur, The reversal may be short term so it is important to use various time
charts for confirmation.
The system is designed to detect trend changes both long term and short term
Pay close attention to slope changes of the moving average and the crossovers. For example the 5 EMA when it crosses the 10 EMA. A cross of the 10 EMA over the 20 EMA is confirmation.
For even longer time frames use daily, weekly and monthly crossovers to detect trend changes.
It is also very helpful to be mindful and mark with horizontal lines previous support and resistance areas on charts. Murrey Math Fractals are a great tool for indicating oversold/overbought areas. I use the Murrey Math lines as a indication and confirmation of reversals.
Included on the above charts are white arrows indicating buy/sell signals generated by Sierra's Spreadsheet System for Trading, an automatic trading study, as well as Murrey Math indicators. A link to the study: Sierrra Chart Support
If you wish to try out this system, Sierra Chart has a free 2 week trial.
1. Rules for Daytraders. http://www.rightline.net/stock-trading-online/online-stock-trading-tips.html
2 Never add to a losing trade. Get out of a losing trade quick. Minimize loses let winners run.
3. Do not have a futures trade on during market moving events. Let the trade develop. Economic Calender https://www.dailyfx.com/calendar
4. Check other world markets http://www.investing.com/indices/indices-futures
5. Have a consistent repeatable pattern https://www.moneyshow.com/articles/daytraders-17207/
6. Big Traders like to jamb the futures higher end of day especially during bullish markets. Friday end of day rallies are almost a given. Overnight futures gap up probably 80% of the time.
7. Before trading for real, practice. Interactive Brokers offers practice accounts and Sierra Charts allows for simulated trading and back testing your system. Think or Swim is great trading platform and offers paper trading.
8. During the day there are "chop zones" when prices will chop back and forth over a small range.
Do not attempt to trade during these chop periods, rather wait for clear signals. It only takes one or two trades a day to make decent profits. Don't attempt to out trade the pros. They will steal your money especially at the end of day and overnight sessions. Overtrading leads to losses. Wait for the favorable oversold/overbought setups with clear reversal signals.
Trading View - A great free online charting resource
Today's News and Useful Financial Market Links
Seven pieces of Advice for New Traders 7 Things You Need As a Trader
Think or Swim is a great trading/charting platform that is free to use.
Twitter is a great source of infomation lots of great traders post there Twitter traders.
Tweetdeck is better because it allows for more info. Tweetduck is a stand alone version of Tweetdeck and is a great program.
There are plenty of good trading books The Disciplined Trader and Trading in the Zone by Mark Douglas are highly recommended as well is One Good Trade by Mike Bellafiore. Mark Minervini has many good books also including How to Trade Like a Stock Market Wizard.
Start.me is a great program for sharing bookmarks. Here are my Markets bookmarks.
If you need additional instructions, use the contact form.