Moving Averages and Periods

In previous chapters, you were shown how to use specific moving

averages. Now we need to identify and discuss how to use them

intraday. A moving average is, in fact, trend and can be used in both

long- and short-term analysis of a stock or market. In most cases,

you will use an exponential moving average, which gives more

weight to the newer data. In previous chapters we used the 50- and

12-day exponential moving average to stay with trend. When you

trade intraday, there are two exponential moving averages that look

and act like the 50- and 12-day exponential moving averages. These

are the 7- and the 17-period exponential moving averages of the

close. These two moving averages are to be used only on a fiveminute

bar chart. When price is above the 7-period moving average

it tends to trend for longer periods of time. When price moves

below the 7 period exponential average it tends to stop at the 17. If

the 17-period does not hold, the price will fall to the next support

area. The 7-period measures short-term trend and the 17-period

measures the intermediate trend, just as the 12-day and the 50-day

moving averages apply to longer-term analysis. You can use the two

moving averages to keep you in trend both long and short. If price

moves above the 7- and 17-day averages, you are long, and if price

drops below the 7-day average, you might consider shorting. Figure

6.9 shows how the two moving averages are used to stay short in a

downtrend.

In Figure 6.9, the moving average line closest to the price bar is

the 7 and the one farthest away or far above price is the 17. From

the open of the day, the stock was in a bearish trend, moving below

both the 7- and the 17-period exponential moving average within 10

minutes of the open and staying below them for 50 minutes. As long as price stays below the two moving averages, the intraday trend is

bearish. Note that at 10:00 A.M. the price stabilized and did not fall

further. Ten minutes later, price began to rebound off of $68 1/2, rising

to $69 and beginning to consolidate. Later in the day, around noon,

the price broke out of consolidation to $697/16. In both cases, price

moves above and below the 7- and 17-period moving average. I have

used these moving averages successfully for over 12 years. The key

is to use them in conjunction with a five-minute bar chart. If you

attempt to use them in any other time frame, you will not get the

same result.

Figure 6.10 shows the 7- and 17-period exponential moving

average of a five-minute bar chart. Remember that the 7-period

moving average is the one closest to price and the 17 is furthest

away. As price moves out of a consolidation and begins to strongly

trend, you can see the value of both moving averages. They not only

show the direction but the strength of the trend. As long as price

holds above the 17-period average, the trend is strong. If it holds

above both, you have a trend that will carry you much higher. This

is a perfect example of how screening a stock and using intraday

13:30 14:00 14:30 15:00 15:30 16:00 16:30 17:00 17:30

trend trading tactics capture points instead of fractions. This is typical

of the type of trade a high-probability trader will enter, and it

shows why this strategy is superior to scalping. Micron Technology

gave only one high-probability buy signal all day, but you could

have made more than three points on one trade. Remember, the

best trends for intraday trading occur in the first two hours of the

day and the last two and a half hours of the day. As you examine Figure

6.10, note how the two moving averages keep you in the stock

as it trends intraday. There is simply no reason to abandon this

trade unless it penetrates the seven-period exponential moving

average. Use the violation of the moving average as a sell signal

when the trend looks like this one and when it occurs at the end of

the day.

Electronic trading tactics from a high-probability perspective

are much more relaxed and focused than the frantic tactics of scalping.

High-probability traders are looking for only three to five trades

a day, staying with the trend until it ends. They use technical analysis

and screening procedures to find high-probability trades, and

then they use technology to control the risk of each trade.

In previous chapters, you were shown how to use specific moving

averages. Now we need to identify and discuss how to use them

intraday. A moving average is, in fact, trend and can be used in both

long- and short-term analysis of a stock or market. In most cases,

you will use an exponential moving average, which gives more

weight to the newer data. In previous chapters we used the 50- and

12-day exponential moving average to stay with trend. When you

trade intraday, there are two exponential moving averages that look

and act like the 50- and 12-day exponential moving averages. These

are the 7- and the 17-period exponential moving averages of the

close. These two moving averages are to be used only on a fiveminute

bar chart. When price is above the 7-period moving average

it tends to trend for longer periods of time. When price moves

below the 7 period exponential average it tends to stop at the 17. If

the 17-period does not hold, the price will fall to the next support

area. The 7-period measures short-term trend and the 17-period

measures the intermediate trend, just as the 12-day and the 50-day

moving averages apply to longer-term analysis. You can use the two

moving averages to keep you in trend both long and short. If price

moves above the 7- and 17-day averages, you are long, and if price

drops below the 7-day average, you might consider shorting. Figure

6.9 shows how the two moving averages are used to stay short in a

downtrend.

In Figure 6.9, the moving average line closest to the price bar is

the 7 and the one farthest away or far above price is the 17. From

the open of the day, the stock was in a bearish trend, moving below

both the 7- and the 17-period exponential moving average within 10

minutes of the open and staying below them for 50 minutes. As long as price stays below the two moving averages, the intraday trend is

bearish. Note that at 10:00 A.M. the price stabilized and did not fall

further. Ten minutes later, price began to rebound off of $68 1/2, rising

to $69 and beginning to consolidate. Later in the day, around noon,

the price broke out of consolidation to $697/16. In both cases, price

moves above and below the 7- and 17-period moving average. I have

used these moving averages successfully for over 12 years. The key

is to use them in conjunction with a five-minute bar chart. If you

attempt to use them in any other time frame, you will not get the

same result.

Figure 6.10 shows the 7- and 17-period exponential moving

average of a five-minute bar chart. Remember that the 7-period

moving average is the one closest to price and the 17 is furthest

away. As price moves out of a consolidation and begins to strongly

trend, you can see the value of both moving averages. They not only

show the direction but the strength of the trend. As long as price

holds above the 17-period average, the trend is strong. If it holds

above both, you have a trend that will carry you much higher. This

is a perfect example of how screening a stock and using intraday

13:30 14:00 14:30 15:00 15:30 16:00 16:30 17:00 17:30

trend trading tactics capture points instead of fractions. This is typical

of the type of trade a high-probability trader will enter, and it

shows why this strategy is superior to scalping. Micron Technology

gave only one high-probability buy signal all day, but you could

have made more than three points on one trade. Remember, the

best trends for intraday trading occur in the first two hours of the

day and the last two and a half hours of the day. As you examine Figure

6.10, note how the two moving averages keep you in the stock

as it trends intraday. There is simply no reason to abandon this

trade unless it penetrates the seven-period exponential moving

average. Use the violation of the moving average as a sell signal

when the trend looks like this one and when it occurs at the end of

the day.

Electronic trading tactics from a high-probability perspective

are much more relaxed and focused than the frantic tactics of scalping.

High-probability traders are looking for only three to five trades

a day, staying with the trend until it ends. They use technical analysis

and screening procedures to find high-probability trades, and

then they use technology to control the risk of each trade.