On a daily chart that would consist of the 5-day, 10-day and 20-day MAs. On a weekly chart that would be the 25-day (5 weeks), 50-day (10 weeks), and 100-day (20 weeks) MAs. This orderliness works best for me because I like the symmetry of the 10 period MA being twice as long as the 5 period MA, and the 20 period MA being twice as long as the 10 period MA. This just seems more balanced and proportional to me and I like how the relationships between these moving averages develop over time. Fortunately for me and the idea of simplicity, the Bollinger Bands includes the 20 period moving average so by using this indicator I get both the 20 period MA and the Bollinger Bands themselves.
“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.”
Being a chart reader rather than a price predictor, I tend to let trends develop (whether up, down, or sideways) before making a buy or sell decision. As a result, I often get involved in 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 (5-day below the 10-day and 20-day MA). I usually find these situations while scanning the charts for MACDs that are below zero, a MACD Histogram that is moving upward, and a 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 I expect of them.
When 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. Then as the price continues to move up I simply hold on for the ride while simultaneously watching the three MAs as they interact with each other. (I use just the opposite information to determine exit points).
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?
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 that 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. Finally, when the chart tells me things have changed, I also change my investments to always remain in sync with the market.
Being in sync with the market is how investors make money. Being out of sync with the market is how investors lose money. And for my way of thinking, making money is the whole point of investing.