The Perfect Moving Averages for Day Trading

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The Perfect Moving Averages for Day Trading

To make lightning-fast buy and sell decisions, day traders need continual data on short-term price activity. This is accomplished by using intraday bars wrapped in numerous moving averages, which allows for fast analysis that exposes present hazards (as well as the most advantageous entries and exits).These averages also serve as macro filters, alerting the attentive trader to the optimal periods to sit back and wait for better circumstances.

Choosing the appropriate moving averages improves the consistency of all technically-based day trading techniques, but weak or misaligned settings impair potentially lucrative approaches. In most circumstances, similar settings will operate in all short-term time frames, enabling the trader to make necessary modifications based only on the length of the chart.

Given this consistency, a similar set of moving averages will work for scalping strategies as well as morning and afternoon buying and selling. The trader responds to varying holding periods solely based on chart length, with scalpers concentrating on 1-minute charts and regular day traders examining 5-minute and 15-minute charts. This approach also includes overnight holds, enabling swing traders to utilize those averages on a 60-minute chart.

Key Takeaways

  • Moving averages improve the dependability of all technically-based day trading methods, and similar settings will usually operate in all short-term time frames.
  • 5-, 8-, and 13-bar simple moving averages (SMAs) are ideal inputs for day traders looking for a competitive advantage in trading the market from both the long and short sides.
  • Moving averages also serve as macro filters, alerting the attentive trader to the optimal periods to sit back and wait for better circumstances.
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5-8-13 Moving Averages

The use of 5-, 8-, and 13-bar simple moving averages (SMAs) is ideal for day trading methods. These are Fibonacci-tuned settings that have endured the test of time, but they take interpretative abilities to operate properly. Examining relative correlations between moving averages and price, as well as moving average slopes that represent tiny fluctuations in short-term momentum, is a visual process.

Day traders may take advantage of increases in observed momentum by purchasing, while falls suggest the need to exit. Drops that cause bearish moving average rollovers in various time frames provide short-term sales opportunities, with successful sales covered when moving averages begin to rise. The method also detects sideways markets, alerting the day trader when intraday moving is weak and opportunities are few.

Examples Using Moving Averages

Using 5-8-13 in a Long Trade. Image by Sabrina Jiang © Investopedia2020

On the 5-minute chart, Apple Inc. (AAPL) forms a basing pattern above $105 (A) and breaks out in a short-term rally during the lunch hour (B).SMAs of 5, 8, and 13 bars indicate to higher ground, while the space between moving averages grows, indicating increased rally momentum. Price goes into bullish alignment on top of the moving averages, pointing to a 1.40-point swing that might provide substantial day trading returns.

After 12 p.m., the rally stops, with price falling back to the 8-bar SMA (C), while the 5-bar SMA pulls back and finds support at the same level (D), ahead of a last rally drive. When price breaks over the 5-bar SMA, aggressive day traders may grab gains or wait for moving averages to flatten out and roll over (E), as they did in the mid-afternoon session. Both price levels provide advantageous exits.

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Using 5-8-13 in a Short Sale. Image by Sabrina Jiang © Investopedia2020

Apple stock settles about $109 at the close of a session (A) and falls slightly the following morning (B).The 5-, 8-, and 13-bar SMAs are pointing to lower ground, while the space between moving averages is increasing, indicating that the sell-off momentum is increasing. Price goes into bearish alignment near the bottom of the moving averages, ahead of a 3-point swing that presents solid short-term profit opportunities.

Mid-morning, the sell-off pauses, raising price into the 13-bar SMA (C), while the 5-bar SMA rebounds until it hits resistance at the same level (D), before a last sell-off shove. Aggressive day traders may benefit from short sales when the price rises above the 5-bar SMA, or they can wait for moving averages to flatten out and turn higher (E), as they did in the mid-afternoon. Both price levels provide advantageous short sale exits.

Signals to Stand Aside

Interrelationships between price and moving averages also indicate times of negative opportunity cost, when speculative money should be kept safe. Trendless markets during times of extreme volatility will cause 5-, 8-, and 13-bar SMAs to whipsaw on a massive scale, with horizontal orientation and frequent crossings warning attentive traders to sit on their hands.

Trading ranges widen in turbulent markets and narrow in non-trending markets. Moving averages will exhibit similar tendencies in both circumstances, advising prudence with day trading positions. Because they have a large influence on the profit and loss statement, these defensive traits should be memorized and used as an overriding filter for short-term tactics.

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Avoiding Whipsaws. Image by Sabrina Jiang © Investopedia2020

Apple bobs and weaves during an afternoon session in a choppy and volatile pattern, with the price oscillating within a 1-point range. SMAs of 5, 8, and 13 bars exhibit comparable whipsaws, with many crossings but minimal alignment between moving averages. These high noise levels alert the astute day trader to raise their positions and move on to another investment.

The Bottom Line

5-, 8-, and 13-bar simple moving averages are ideal inputs for day traders looking for a competitive advantage in trading the market on both the long and short sides. Moving averages also serve effectively as filters, alerting quick-thinking market participants when risk is too high for intraday trading.

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