Brandon Wendell, CMT
Brandon Wendell
When trading or investing, you need to properly identify the trend that your security is in so that you can trade in the direction that offers the highest probability for profit. At Online Trading Academy, we know that there is no substitute for reading price itself. Our patented Core Strategy involves finding the trend of a security as well as many other parts to increase your chances of profiting in the markets.
New traders often struggle with properly identifying the proper trend on a chart. There are some technical tools that can assist them with trend identification. One such tool is the moving average. Moving averages simply average the previous closing prices of a security. If the current price is above the previous closing averages, then you are likely in an uptrend. When the current price is trading below the previous closes, then you are likely in a downtrend.
Another issue for traders is which moving average is the correct one to use. Last month, I discussed the usefulness of identifying the cycle of a security as an odds enhancer for predicting potential highs and lows in price. Knowing the stock cycle may also help you in figuring out which moving average length will be best to use.
All securities have cycles that affect the price movement. As indicated in the prior article, if we can identify the cycle that is dominating our stock, we can identify with a higher probability when tops and bottoms in price will occur and when we should buy or sell our stock. Stock cycles are measured from trough to trough. The troughs are the low points in price that correspond with the lows in the cycle.
Looking at the 30 minute chart of Intel (INTC), we can see that the stock seems to make bottoms at a fairly regular interval.
When we are using moving averages, we acknowledge that it is an average of price and that price will move away from that average and revert back during a trend. The average should be much like the black line dissecting the stock cycle I drew in figure 1. We want an average that is half the length of the cycle so that it will show our peaks and troughs as movements from and to the average itself.
Dividing the 15 period cycle of the INTC chart tells us that we should use an eight period moving average, (15 / 2 = 7.5 so we round up).
In an uptrend, we should see prices move away from the average only to snap back to them when the trough of the cycle occurs. If we are changing to a downtrend, then the average would be violated and the price would bounce off of it to the downside before returning during peaks in the cycle. If the average is being violated in both directions, then we do not have a strong trend in that time frame.
By using the right average for the time frame you are trading, you can increase your odds for success. Just be careful to check the stock cycle from time to time as cycles can change with market conditions. We need to adapt with the markets for maximum success.
Trend identification is only one part of the Core Strategy. In addition to knowing which direction to trade, you need to know the correct entry and exit points. These points are known as Supply and Demand Zones. To learn how to discover these zones, visit your local Online Trading Academy center today! Until next time, trade safe and trade well!
Neither Freedom Management Partners nor any of its personnel are registered broker-dealers or investment advisers. I will mention that I consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because I consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that I am telling you to trade the strategies or securities. Keep in mind that we are not providing you with recommendations or personalized advice about your trading activities. The information we are providing is not tailored to any individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security or a suggestion that it is suitable for any specific person. Keep in mind that all trading involves a risk of loss, and this will always be the situation, regardless of whether we are discussing strategies that are intended to limit risk. Also, Freedom Management Partners’ personnel are not subject to trading restrictions. I and others at Freedom Management Partners could have a position in a security or initiate a position in a security at any time.
Editors’ Picks
EUR/USD hits two-day highs near 1.1820
EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.
GBP/USD reclaims 1.3600 and above
GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.
USD/JPY drops back below 157.00, as focus shifts to Japan snap election
USD/JPY is back in the red below 157.00 in the Asian session on Friday. The Japanese Yen recovers ground against the US Dollar amid some profit-taking ahead of Japan's snap general election on Sunday. The preliminary reading of the Michigan Consumer Sentiment Index report for February will be released later on Friday.
Editors’ Picks
EUR/USD: US Dollar to remain pressured until uncertainty fog dissipates Premium
The EUR/USD pair lost additional ground in the first week of February, settling at around 1.1820. The reversal lost momentum after the pair peaked at 1.2082 in January, its highest since mid-2021.
Gold: Volatility persists in commodity space Premium
After losing more than 8% to end the previous week, Gold (XAU/USD) remained under heavy selling pressure on Monday and dropped toward $4,400. Although XAU/USD staged a decisive rebound afterward, it failed to stabilize above $5,000.
GBP/USD: Pound Sterling tests key support ahead of a big week Premium
The Pound Sterling (GBP) changed course against the US Dollar (USD), with GBP/USD giving up nearly 200 pips in a dramatic correction.
Bitcoin: The worst may be behind us
Bitcoin (BTC) price recovers slightly, trading at $65,000 at the time of writing on Friday, after reaching a low of $60,000 during the early Asian trading session. The Crypto King remained under pressure so far this week, posting three consecutive weeks of losses exceeding 30%.
Three scenarios for Japanese Yen ahead of snap election Premium
The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.
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