Day traders need continuous feedback on short-term price action to make lightning fast buy and sell decisions. Intraday bars wrapped in multiple moving averages serve this purpose, allowing quick analysis that highlights current risks as well as the most advantageous entries and exits. These averages work as macro filters as well, telling the observant trader the best times to stand aside and wait for more favorable conditions.
Choosing the right moving averages adds reliability to all technically-based day trading strategies , while poor or misaligned settings undermine otherwise profitable approaches. Given this uniformity, an identical set of moving averages will work for scalping techniques as well as for buying in the morning and selling in the afternoon.
The trader reacts to different holding periods using the charting length alone, with scalpers focusing on 1-minute charts, while traditional day traders examine 5-minute and minute charts. This process even extends into overnight holds, allowing swing traders to use those averages on a minute chart. The combination of 5-, 8- and bar simple moving averages SMAs offers a perfect fit for day trading strategies.
These are Fibonacci -tuned settings that stand the test of time, but interpretive skills are required to use the settings appropriately. Increases in observed momentum offer buying opportunities for day traders, while decreases signal timely exits. Decreases that trigger bearish moving average rollovers in multiple time frames offer sell short opportunities, with profitable sales covered when moving averages start to turn higher. The process also identifies sideways markets, telling the day trader to stand aside when intraday trending is weak and opportunities are limited.
Apple AAPL builds a basing pattern above A on the 5-minute chart and breaks out in a short-term rally over the lunch hour B. Price moves into bullish alignment on top of the moving averages, ahead of a 1. The rally stalls after 12 pm , dropping price 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 final rally thrust.
Aggressive day traders can take profits when price cuts through the 5-bar SMA or wait moving averages to flatten out and roll over E , which they did in the mid-afternoon session. Both price levels offer beneficial exits. Price moves into bearish alignment on the bottom of the moving averages, ahead of a 3-point swing that offers good short sale profits.
The selloff stalls mid-morning, lifting price into the bar SMA C while the 5-bar SMA bounces until it meets resistance at the same level D , ahead of a final selloff thrust. Aggressive day traders can take short sale profits while price lifts above the 5-bar SMA or wait for moving averages to flatten out and turn higher E , which they did in the mid-afternoon.
Both price levels offer beneficial short sale exits. Interrelationships between price and moving averages also signal periods of adverse opportunity-cost when speculative capital should be preserved. Trendless markets and periods of high volatility will force 5-, 8- and bar SMAs into large scale whipsaws , with horizontal orientation and frequent crossovers telling observant traders to sit on their hands.
Trading ranges expand in volatile markets and contract in trendless markets. In both cases, moving averages will show similar characteristics that advise caution with day trading positions. These defensive attributes should be committed to memory and utilized as an overriding filter for short-term strategies because they have an outsized impact on the profit and loss statement. AAPL bobs and weaves through an afternoon session in a choppy and volatile pattern, with price whipping back and forth in a 1-point range.
These high noise levels warn the observant day trader to pull up stakes and move on to another security. The moving averages also work well as filters, telling fast-fingered market players when risk is too high for intraday entries. Adjusting Strategies to Moving Average Slopes. Dictionary Term Of The Day. Broker Reviews Find the best broker for your trading or investing needs See Reviews.
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Become a day trader. Signals to Stand Aside Interrelationships between price and moving averages also signal periods of adverse opportunity-cost when speculative capital should be preserved. The Bottom Line 5-, 8- and bar simple moving averages offer perfect inputs for day traders seeking quick profits on the long and short sides. No thanks, I prefer not making money. Get Free Newsletters Newsletters.More...