Stocks are getting another boost today, as positive trade news dominate headlines. That said, the U.S. suspended plans to tariff Mexico over the weekend, which also gives hopes that a U.S.-China trade deal can be resolved soon.
As for me, I don’t even bother that much with news except skim the headlines.
I don’t have an information edge. If anything, trying to trade off the news doesn’t work for me.
Hear me out.
Have you ever seen a stock spike up after a news headline?
Well, it happens all the time, and that’s because institutions have computer trading programs that automatically buy and sell stocks when specific keywords or phrases are used in a breaking news headline or tweet.
That said, speed is definitely not my best asset as a trader… and that’s why the type of trading I do focuses on preparation, timing, and a lot of charting…
(I send out my watchlist for the week every Sunday to my clients, I like to have my prices ready, entries and exits, that’s how I’m able to keep my emotions in check and stay disciplined. Want to start receiving my watchlist, and more? Join Now)
So how have I been able to achieve seven-figures in trading profits in my career while ignoring the news and the high-speed trading systems?
I use stock market indicators, which help me eliminate the majority of noise we see in markets. Read on to learn which ones they are, and why you should be using them too.
Now, I look at a number of technical analysis (TA) indicators… however, there are some that I focus on more than others.
For example, when I’m looking for the rounded bottom break out (RBB) or pinball setup… there’s one indicator I’m focusing on – the moving averages.
If you don’t already know, moving averages remove noise from the price action and allows you to spot trends in stocks and exchange-traded funds (ETFs).
You see, when you just focus on the intraday moves… looking at it tick by tick, you’re missing the big picture… that’s why I follow a specific set of rules when I’m looking for my best setups, and they involve looking at moving averages on the daily chart for the most part.
That said, let’s take a look at what moving averages are and how you can use them to spot potential trades.
Moving Averages Explained
There are two main types of moving averages that traders focus on: simple and exponential.
Now, simple moving averages (SMAs) place equal weight on price action… if you think back to one of your math classes, you’re simply adding up the closing prices and dividing them by a specified number of periods.
For example, if you’re looking at the 20-day (SMA), your charting software will take a rolling window of the closing prices over the past 20 days… you don’t have to worry about all the math behind this…
… I’ll show you how I use these moving averages shortly.
On the other hand, we have exponential moving averages (EMAs)… with the EMA, it actually places a greater weight on recent price action.
Basically, we’re looking for specific price action to signal when we should get into a trade.
Timing Entries and Exits With Moving Averages
Here’s a look at the daily chart of NTNX.
Here’s a look at the checklist for the set I’m looking at – the Pinball.
___1. The trend must be in a definable downtrend, 8 EMA is below or equal to the 20 SMA, 20 SMA is below the 34 EMA, 34 EMA is below the 50 SMA, and 50 SMA is below the 200 SMA.
___2. Some form of a bottom forming. Some examples include, but are not limited to. double bottom, lower high, higher low, higher high, multi-bar candlestick bottom.
___3. There should be 10% or more from the 8 EMA to the 34 EMA.
___4. Yesterday’s close must be above 8 EMA.
___5. Buy on positive trading above the 8 EMA after yesterday’s close above the 8 EMA.
___6. Take profits on at least half of the position at the 34 EMA on the daily chart, or 200 SMA on the 60 minute chart, whichever comes first.
___7. Use a stop on a close below the 8 EMA.
As you can see, the stock checked off some of the rules we’re looking for.
Now, the green line is the 8-day EMA, while the yellow dotted line is the 34-day EMA. The 50-day SMA is the blue line, and the 200-day SMA is the light pink line.
If you look closely at the chart… you can see the stock closed above the 8-day EMA… so at that point, you can look to get long.
However, there’s one thing to keep in mind… I’m always looking to take profits around the 34 EMA, even if it’s not 10% above the 8 EMA.
You see, moving averages will fluctuate as we’re in the trade. For example, if the stock consolidates and just trades in a tight range…
… the 34 EMA will trickle down… and we don’t want to leave our targets or stops the same as we got in… because at that point, you’re not taking into account new information, which is a no-no for me.
That said, if the 34 EMA pulls in a little bit, and the stock gets around that level… I’ll look to take profits.
As you can see if you can spot a pattern you like… moving averages can signal when to get into a stock… not only that, they can help you identify areas to stop out of a trade.
With the Pinball setup, if the stock closes below the 8 EMA, I’m out of it because my thesis is broken, and the stock isn’t trending higher.
I also use moving averages in another chart setup – the RBB.
Rounded Bottom Breakout Moving Averages
One of my favorite setups is the RBB – and just like the Pinball, there is a checklist for it.
____ 1. Down Trending Price Action – Lower lows and Lower highs
____ 2. Moving Averages Confirming Downtrend – 8EMA, 20 SMA and 50 SMA are sloped downward and are almost parallel to each other. The 200 SMA is somewhere above the 8 EMA, 20 SMA, and 50 SMA.
____3. Stalling Price Action – Price starts to slow its descent and may move within a small range for a while (in a box-like pattern).
____4. Price Rising and the 8 EMA Crossing Above the 20 SMA – Pay Attention
____5. “The Switch” – The 8 EMA is now Above the 20 SMA. Price continues above the 8 EMA.
____6. Breakout – Price closes above the 50 SMA.
____7. Moving Averages Confirming the Breakout – Price is above the 50 SMA. 8 EMA is above the 20 SMA, and 20 SMA is above the 50 SMA.
____8. Target exit is the 200 SMA
Here’s a look at how I set up the charts for the RBB.
Now, we actually traded MX.TO (this is a Canadian stock listed on the Toronto Stock Exchange).
Notice the encircled area of the chart. We actually bought around there, when we saw the stock close above the 50 SMA… and the moving averages were confirming the breakout.
Now, notice how the stock got close to the 200 SMA (the light pink line)… we didn’t hold onto it looking for the breakout… we actually took some profits off the able around there.
You’ll also notice the stock actually pulled back after getting close the the 200 SMA… well, with the RBB setup, we use the 50 SMA to stop out.
In other words, if the stock closes below the 50 SMA, we’ll stop out on the rest of the position, which we did… and we actually still made money on that trade.
Well, when the stock started moving up… the 50 SMA moved up too.
So when it actually closed below the 50 SMA, it was actually above our entry price.
As you can see, moving averages are very powerful… and they’re one of the main indicators I focus on. Now, I actually have a Must Watch List for new members to get them up to speed on charting… if you’re interested in learning more about how I use charts to time my entries and exits, click here to find out more… or if you’re ready to get started, click here.