When I’m looking at stock charts with several indicators displayed, one of the indicators I like to see multiple (3) moving averages (MA). Generally my favorite moving averages are the 5, 10 and 20 period moving averages. On a daily chart that would be 5 days, 10 days and 20 days. On a weekly chart that would be 25 days (5 weeks), 50 days (10 weeks), and 100 days (20 weeks). I prefer this orderliness of having the 10 period twice as long as the 5 period, and the 20 period twice as long as the 10 period. It seems balanced and proportional to me and I like how the relationships between these moving averages develop over time. Fortunately the Bollinger Bands includes the 20 period moving average, so by using Bollinger Bands I get both the 20 period moving average as well as the bands themselves.
In a strong up market I’d ideally like to see the stock price above the 5 period MA which would be above the 10 period MA which would be above the 20 period MA. In a strong down market I would like to see just the opposite type of movement. Unfortunately this rarely happens this neatly and the price and the MAs are often in some phase of total disarray. The key is to figure out whether this is simply the volatility of the marketplace, the less than desirable strength/weakness of the underlying equity, or the fact that the equity may be moving from a period of trending into an area of consolidation. This is often not an easy thing to determine.
Being a chart reader rather than a price predictor, I tend to let trends (whether up, down, or sideways) develop on their own first before I make a decision or take a position on whether it’s trending or consolidating. As a result, I get into most of my trades late on purpose. I don’t have a problem with this strategy because I’d rather be late than wrong.
One of my favorite entry points is after a stock’s price has moved down and all of the above three MAs have moved down in the right order along with it. I usually find these situations while looking at charts for an MACDs that are below zero, an MACD Histogram that is moving upward, and an MACD that is about to cross its signal line. When I see this occurring, I look at the stock chart to see if the stock’s price and MAs are doing what is expected of them.
As the MACD Histogram crosses zero and the MACD crosses the signal line I expect to see the price surge through the three MAs. As the price pierces those averages they will begin to twist and turn on each other and hopefully reverse their order completely. As the price moves up I simply hold on for the ride while watching the MACD and the relationship of the three MAs as they interact with each other. (I use just the opposite information to determine exit points).
“If you want to know everything about the market, go to the beach. Push and pull your hands with the waves. Some are bigger waves, some are smaller. But if you try to push the wave out when it's coming in, it'll never happen. The market is always right.”
Two other indicators I usually like to plot along with the ones above are the ADX and the RSI. I use the ADX to let me know the strength of the movement and whether the pressure is coming from the buying or the selling side. I use the RSI to provide me with a heads up on whether the stock is being overbought or oversold. I use these two indicators as confirmation of the first two indications identified above (the MACD and the MA Crossover), and I use the two above as confirmation of the price movement of the stock. Sounds simple, right?
When everything above is moving in the same direction (up, down, or sideways) I invest appropriately. My investing philosophy is based upon probabilities and trends. If a stock price is moving in a direction that is confirmed by all of the indicators above (whether up, down, or sideways) then that stock is moving in a trend. Probability says that the trend will most likely continue for some time. In fact, as dumb as this sounds, the trend will continue until it doesn’t. And I will stay in sync with that trend until the trend changes. If it’s trending up I want to be long. If it’s trending down I want to be short. If it’s trending sideways I want to maintain my position (in or out) until I can determine whether an uptrend or downtrend is being established. When the chart tells me things have changed then I change also to remain in sync with the market.
Here's the reason. Being in sync with the market is how an investor makes money. Being out of sync with the market is how an investor loses money. For me, making money is what investing is all about.