Day traders need continuous feedback on short-term price behavior in order to make lightning-fast buying and selling decisions. Intraday bars wrapped in multiple moving averages are used for this purpose, allowing quick analysis to highlight current risks (and the most favorable entries and exits). These averages can also be used as macro filters, telling careful traders that the best time is to stand aside and wait for more favorable conditions.
Choosing the right moving average can increase the reliability of all technical-based intraday trading strategies, while poor or misaligned settings can undermine other profitable methods. In most cases, the same settings will apply to all short-term time frames, allowing traders to make the required adjustments only through the length of the chart.
Given this consistency, the same set of moving averages will apply to scalping techniques-as well as buying in the morning and selling in the afternoon. Traders only use the chart length to react to different holding periods. Scalpers focus on the 1-minute chart, while traditional day traders check the 5-minute and 15-minute charts. This process even extends to overnight holdings, allowing swing traders to use these averages on 60-minute charts.
- Moving averages add reliability to all technology-based intraday trading strategies, and in most cases, the same settings will apply to all short-term time frames.
- 5, 8, and 13 simple moving averages (SMA) provide perfect input for day traders, who seek advantages in long and short market transactions.
- Moving averages can also be used as macro filters, telling keen traders the best time to stand by and wait for more favorable conditions.
5-8-13 Moving Average
The combination of 5, 8 and 13 simple moving average (SMA) is very suitable for day trading strategies. These are Fibonacci adjustment settings that have stood the test of time, but require interpretation skills to use them correctly. This is a visual process—checking the relative relationship between moving averages and prices—and the slope of the moving average reflecting subtle changes in short-term momentum.
The observed increase in momentum provides day traders with buying opportunities, while the decrease indicates a timely exit. Triggering a fall in the bearish moving average rollover over multiple time frames provides short-selling opportunities. When the moving average starts to turn higher, profitable sales are covered. The process also identifies horizontal markets and tells day traders to stay on the sidelines when intraday trends are weak and opportunities are limited.
Example of using moving average
Apple (AAPL) established a basic pattern above 105 USD (A) on the 5-minute chart and broke through the short-term rebound during lunch time (B). The 5, 8 and 13 SMA points to higher ground, while the distance between the moving averages increases, indicating that the upward momentum is increasing. The price entered the bullish line above the moving average, providing good intraday trading profits before the 1.40 point volatility.
The rally stalled after 12 pm, the price fell back to the 8-line moving average (C), while the 5-line moving average fell back and found support at the same level (D), and then the final rebound thrust. Aggressive day traders can profit when the price drops below the 5 moving averages, or wait for the moving average to flatten out and roll back (E), which they do in the afternoon hours. Both price levels provide a favorable exit.
Apple stock consolidates around $109 at the end of a trading day (A), and then moves lower the next morning (B). The 5, 8, and 13 SMAs are pointing to the low, and the distance between the moving averages has increased, indicating that the selling momentum is rising. The price entered the bearish line at the bottom of the moving average before the 3-point fluctuation that provided a good short-sale profit.
The selling stopped in the middle of the morning, pushing the price up to 13 SMAs (C), while the 5 SMAs bounced back until they met resistance at the same level (D), and then the final selling push was made. Aggressive day traders can make short-selling profits when the price rises above the 5 moving averages, or wait for the moving average to flatten out and turn higher (E), which they do in the afternoon. Both price levels provide a favorable short-selling exit.
Temporarily shelved signal
The interrelationship between price and moving average also heralds a period of unfavorable opportunity cost in which speculative capital should be retained. Trendless markets and periods of high volatility will force 5, 8 and 13 SMAs to enter a large-scale wash. The horizontal direction and frequent crossovers tell keen traders to sit in their hands.
The trading range expands in volatile markets and shrinks in non-trend markets. In both cases, the moving average will show similar characteristics, and it is recommended that day trading positions be treated with caution. These defensive attributes should be kept in mind and used as the primary filter for short-term strategies, as they have a huge impact on the income statement.
Apple fluctuates in a choppy manner during the afternoon trading hours, and the price fluctuates back and forth within a 1-point range. The 5, 8 and 13 SMAs show similar washes with multiple crossovers, but there is almost no alignment between the moving averages. These high noise levels warn careful day traders to pull up shares and switch to another security.
5, 8, and 13 simple moving averages provide perfect input for day traders, who seek advantages in long and short market transactions. Moving averages can also be used as a good filter. When the risk of entering the market during the day is too high, it will tell the agile market participants.