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 eases below 1.0850 on renewed USD strength
EUR/USD stays under pressure and trades in the red below 1.0850 in the European session. Although the ZEW survey for Germany and the Eurozone showed a noticeable improvement in economic sentiment, broad USD strength doesn't allow the pair to gain traction.
GBP/USD drops below 1.2700 on notable US Dollar demand
GBP/USD is extending the downside below 1.2700 in the European trading hours on Tuesday. The ongoing bullish momentum in the US Dollar, despite sluggish US Treasury bond yields, undermines the pair. Mid-tier US housing data are coming up next.
Gold price struggles to lure buyers, holds steady above one-week low ahead of FOMC meeting
Gold price ticks lower amid reduced Fed rate cut bets, elevated US bond yields and stronger USD. Geopolitical tensions could lend some support to the safe-haven XAU/USD and help limit losses.
Why is the crypto market crashing?
The two most important contribution to the ongoing bull market is the meteoric rise in Bitcoin due to the ETF approval and the sudden interest spike in Solana ecosystem. But the recent move suggests that the upward momentum is dissipating and a correction looms.
Canada CPI Preview: Inflation pickup could scale back bets on early interest-rate cut
The Canadian Consumer Price Index is expected to have risen by 3.1% YoY in February. The BoC shows no rush to lower its interest rate. The Canadian Dollar maintains its multi-day lows against the US Dollar around 1.3540.
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