Class 7: Moving Averages & Indicators. Quick Review

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1 Today s Class Moving Averages Class 7: Moving Averages & Indicators 3 Key Ways to use Moving Averages Intro To Indicators 2 Indicators Strength of Lines Quick Review Great for establishing point of Support and Resistance Gives us a framework when looking at a chart Help us determine key pivot points areas Help us determine long term trends and market direction Help with Price Targeting Weakness of Lines It takes 2-3 bounces to confirm the line Constantly re-drawing lines to conform to new data from the stock Chart can get very messy with lots of lines drawn everywhere Sometimes things just don t seem to line up Often times it s just too complicated PAGE 1

Moving Averages Moving Average Overview Very useful because most institutional traders use moving averages Based on an average of the closing prices over a time period (20 Day = average of the close

2 Moving Averages Moving Average Overview Very useful because most institutional traders use moving averages Based on an average of the closing prices over a time period (20 Day = average of the close of the last 20 days) ONLY USEFUL with trending stocks Will NOT be useful when a stock is moving sideways or channelling One more piece of the puzzle Moving Average - Two Types Simple Moving Average (SMA) Exponential Moving Average (EMA) PAGE 2

3 Simple Moving Average (SMA) Simple calculation of the closing prices divided by the time period (20 SMA - add up all the closing prices and divided by 20) Most useful when dealing with Long Term trends. Exponential Moving Average (EMA) Complicated calculation of the closing prices divided by the time period with heavier weighting on the more recent days Most useful when dealing with Short Term trends. My Settings I use two Simple Moving Averages: 100 Period (SMA) 200 Period (SMA) My Settings I use three Exponential Moving Averages: 10 Period (EMA) 20 Period (EMA) 50 Period (EMA) Moving Averages Setup (Notes) PAGE 3

How can moving averages benefit you? Rule #1 - Moving Averages are not effective in a sideways market 1. Help Determine Trend (bullish vs. bearish) 2. Can help give specific entry triggers 3.

4 How can moving averages benefit you? Rule #1 - Moving Averages are not effective in a sideways market 1. Help Determine Trend (bullish vs. bearish) 2. Can help give specific entry triggers 3. My Secret Weapon with Trends Determining Trend Direction The Average serves as a mid-way point When the stock is trading above the average, the stock is said to be in an uptrend When the stock is trading below the average, the stock is said to be in an downtrend When the stock is trading through the average it is in no trend PAGE 4

The Moving Average Cross The Moving Average Cross creates a buy or sell signal Combination of 2 or more Moving Averages When the faster line crosses the slower line it

5 The Moving Average Cross The Moving Average Cross creates a buy or sell signal Combination of 2 or more Moving Averages When the faster line crosses the slower line it indicates a change in direction Using the shorter term lines you can determine the short term trend changed Using the Long Term SMA you can see the BIG trend changes PAGE 5

6 Wanna know a secret? Q. What if you could get Trade Navigator to Automatically Draw your Support & Resistance lines? A: You can accomplish this with Moving Averages (kind of) PAGE 6

Averages as Support and Resistance Moving Averages can serve as a floating support and resistance Use the 10, 20 & 50 period EMA as support and resistance As a stock falls toward a moving average

7 Averages as Support and Resistance Moving Averages can serve as a floating support and resistance Use the 10, 20 & 50 period EMA as support and resistance As a stock falls toward a moving average that average will tend to act as support If the stock drops below the average then the average will flip and work as resistance You can use the moving averages to time entries into trades as well as price to set stops PAGE 7

8 Moving Averages - Rules for Trading When a stock approaches a moving average and bounces: Enter a trade in the direction of the trend Set a stop on the opposite side of the moving average When a stock approaches a moving average & breaks through to the other side: Check your indicators Use your trading knowledge to determine if a reversal is likely. If/when it confirms enter in opposite direction Moving Averages - Trading Angles The steeper the angle, the stronger the trend The more the 3 lines separate, the stronger the trend If you see a MA cross, but the lines are moving sideways, it s probably a false signal PAGE 8

9 ll. Indicators What are indicators? Nothing more than gauges Do gauges run the car? Not the most important piece of the puzzle Should only be used to supplement other trading knowledge Can either confirm your analysis, or alert you to something you may not see Volume The most basic of indicators A reflection of how many shares are being trade that day Confirms the amount of interest in the stock One of the tenets of Dow Theory is volume must confirm the trend Increased volume confirms the trend Low volume indicates a potentially weak trend Think of volume like the gas that fuels the fire of sentiment In an uptrend you want the volume to increase In an downtrend you want the volume to increase PAGE 9

Stochastics - How It Works Plotted across a scale of 0-100 2 lines (Fast & Slow) When the two lines cross = buy or sell signal

An Oscillator based indicator Very useful: During a Sideways market At the end of a trend Coincides with market peaks & valleys

10 Stochastics - How It Works Plotted across a scale of lines (Fast & Slow) When the two lines cross = buy or sell signal Particularly useful in a channel or set trading range 80% line reflects overbought condition 20% line reflects oversold condition An Oscillator based indicator Very useful: During a Sideways market At the end of a trend Coincides with market peaks & valleys Shows overbought/oversold conditions Not useful at the beginning of trends (usually) My Settings K Ave. = 13 D. Ave. = 5 Smoothing = 7 PAGE 10

11 Action Steps Setup your moving averages in your charting software Setup your indicators Watch your stocks and see how they react with the indicators and averages Compare the averages with your trend lines Try to place some trades (virtual, of course) You have one class left in your Scholarship Foundations of Stocks & Options Level 1. Remember we are here to help you all throughout your journey in the Stock Market. Reach out anytime through at or Schedule a Call and one of our Student Coaches will contact you. PAGE 11

Class 6: Trading the Lanes (In-depth Line Drawing and Charting) Review of Class So Far

Today s Class Class 6: Trading the Lanes (In-depth Line Drawing and Charting) Review of class so far Where we are going from here More in-depth technical analysis Trading with brackets (neutral trading)