How to Use Moving Averages in Your Trading

Have you ever wondered how to use moving averages in your trading to actually improve your trading results? Sure, they look great on the chart, but how do you actually use them in your day to day trading to make money, to grow your wealth and to build your income from the market. But before we go any further, make sure you hit the subscribe button and give this video a thumbs up so that you get notified of all of my future videos. Because I've got new trading content coming out all the time and I don't want you to miss a thing. Well, in this video I'm going to show you three, four different methods of how you can use moving averages in your trading practically tangibly to get better results. So let's start with the highest level. One of the best and simplest ways to use moving averages in your trading is as a market regime filter or an index filter. Here on the chart in front of you you can see the S&P 500 index and on it I've got a 200 day moving average plotted. So, so you can see here we've got the price, the bull market from 2020 through to 2021 and we've got the 200 day simple moving average plotted on the chart as well. And so the way you would use the moving average as a market regime filter is when the index is above the long term moving average, then you're going to go long, you're going to trade on the long side. It's a bullish indication. When the market is below the 200 day moving average, then it's a bearish indication and you do better on the short side. Now this is not a perfect signal and you've got to put this sort of filter into your trading system and backtest it and optimize it because maybe 200 days is the right length, maybe it's too long or maybe it's too short, but it's a really great starting point. In general, most trend following strategies will do well if you add a filter to only trade on the long side when the market is above the 200 day moving average. So the first really powerful way to use moving averages in your trading is by using them as a market regime filter. Have the market trade on the long side when the market is above the 200 day or on the short side when the market is below. Now the next way you can use moving averages in your trading is as a filter on the individual stock. So let's pull up a stock here and have a look.

So let's have a look at Apple stock. Here we've got the same, same daily chart. I've got a 200 day moving average on here. And you can use the 200 day moving average as, or sorry, the moving average as a trend filter for the individual stock. So the first part of the strategy was you have the, the, the index filter, the market regime filter that says I'm going to trade long if, if the market is above the long term moving average, then you come to the individual stock and you say I'm going to trade that stock long if it's above its 200 day moving average. So it's a trend filter on the individual stock. You can see that there's periods where it's trending beautifully and it's well above the 200 day moving average here and here. And then there's periods where it's below the 200 day moving average where you don't really want to be holding that stock here for example, here as well. So if you only buy a stock when it is above the 200 day moving average, then you tilt the odds in your favor. Similarly, if you want to go trade on the short side, you'll do much better generally shorting stocks that are below their long term moving average. So using the moving average as a trend filter on the stock that you're trading is a really great way to improve your results. So the next way you can use moving averages is as a signal to enter or exit a trade. So there's several ways you can do this. You can use the price crossing above or below the moving average as the signal, or you can use one moving average crossing above or below the other moving average as the signal. Let's have a look at the chart here. I've got on the chart, on the screen here a chart of Ford Motor Company. I just picked this at random. There's no magic in this, so don't take it as a recommendation about Ford one way or the other. But let's have a look here. I've got the standard daily chart and I've got a 200 day simple moving average. And you could see, you could imagine that the price crossing above the 200 day moving average would be a bullish signal because as we'd already seen, good things tend to happen above the 200 day moving average and bad things tend to happen below it. So you could use the price crossing above the moving average as an entry signal. Now the problem with this as an entry is that you get a lot of whipsaws around the point where the price is crossing over it tends to cross above and below and above and below and do that several times or many times before making a final decision and moving one way or the other. So, so if we have a look here on the chart, let's zoom right in here. Look, the price crossed above the moving average here, but then it crossed back below and then it crossed above and then it crossed below and it was below and then it crossed above and below and so on. So there's a whole bunch of whipsaw signals in there. So the price crossing above a moving average as an entry, while you can use it, it does lead to a lot of whipsaws and not necessarily good quality signals. But it is possible and some trading systems successfully use this. The second way you can use the price crossing the moving average is as an exit. So imagine for instance we got into this trend somewhere here and we held it all the way until price closed below the moving average all the way up here. That was quite a reasonable exit. Yeah, it gave up a lot of profit, but it did capture a big chunk of the trend. So you can use a cross below a moving average as a trend following style exit because what it'll do is it'll keep you in a big move for a long time and it'll give the price a lot of room to move above and below the primary trend. And then when it finally crosses below the long term moving average, then you can get out. That can be an exit signal which can be reasonably good. I've got a number of systems that use a close below the 200 day moving average as an exit. For example, it's kind of like a fail safe exit because if nothing else has got you out before it closes below the 200 day moving average, that's a pretty sure sign that the uptrend is over and you want to get out. So you can use the price closing above or below the moving average as a buy or sell indicator to get in or to exit a position. The second way you can do it is to have two moving averages as I said. So let's grab another moving average here. Let's take another simple moving average and let's use a 50.

So let's make it thick so you can see it. Okay. So the second way you can use moving averages as a signal is through the crossover of two moving averages. So you can see here in blue, the 50 day moving average hugs the price fairly closely and the long term 200 day moving average is quite loosely moving in the direction of the trend. So when the Shorter term moving average crosses above the longer term moving average. That's a bullish signal. You can treat that as a buy signal. And when the short term moving average crosses below the long term moving average like here, then that would be a bearish signal, a sell signal. Now you can absolutely use these as both an entry and an exit signal in your trading. You do have to test them though because sometimes a moving average crossover can be, can be too late. It's quite a lagging signal. So one of my philosophies around trend following for instance is I want to give the trend some time to prove itself before I really jump in. So the 50 day moving average crossing above the 200 like it does here can be a reasonable signal. But if you look at the end of this trend in The Ford Motor Company stock, the 50 day moving average crossing below the 200 day moving average was really, was quite late. It happened a long time after several, almost two months after the price first closed below the long term moving average. So if you wait for the long term moving average come all the way down to the. Sorry, if you wait for the short term moving average to come all the way down to the long term moving average, that exit can be quite lagged. Yes, it does keep you in the trend for a long time, so you'll be able to catch some of those big mega trends. But it, it does give up a lot of profit at the end. So if you can use this as an exit, you want to back test that using amibroker or similar back testing software and compare the results that you get from that exit signal verse just the price closing below the long term moving average or versus standard trailing stop or something like that. But you can definitely use the moving average, a dual moving average crossover as an entry and an exit symbol signal. Sorry, the final way that you can use or another way that you can use the moving averages as an indicator to buy or sell is by looking at the direction of moving average. When the moving average is heading down, then that's a bearish sign. When it's moving up, it's a bullish sign. And when it goes, when it pivots from trending down to trending up, that can be a good buy signal as well. So again, you want to test all of these things for yourself in your backtesting software. But let's have a look in here, let's zoom in. And you can see here that there was a short term sort of downtrend or medium term downtrend and then at some point in here, the moving average ticked up and started moving up. That's the point where the, the medium term trend turned bullish again. And that would have been a reasonably good entry point into this trend. So when the moving average, typically a medium term moving average, is trending down and it starts and it ticks up, that's a point where you might want to buy. And then the same thing can happen at the end of the trend when the meaning term moving average ticks down. Then that would be a bullish indication. And you can see that that happened here on this bar. And that was a much earlier signal than both the price closing below the long term moving average or and it was much, much earlier than the medium term moving average closing crossing below the long term moving average. So just the medium term moving average ticking down can be a reasonable trend following exit as well. But if you look, that's a medium term trend exit because you can see in this big trend here, the medium term moving average ticked down here in this point and again here and then again at the end. So it's more like a swing trading, a medium term swing trading exit. Whereas the price closing below the long term moving average is like a trend following exit. So it really does depend a lot on, on what style of trading you're trying to do. So you want to match the way you use your moving averages to the strategy, the trading strategy that you're trying to design. And then of course, as always, backtest those rules to make sure they really work over a long period of market history to make sure that they are, you know, valid and profitable trading signals. So one thing I want to talk about is the thing called the Golden Cross and the death cross cross. Now these refer to the 50 day moving average and the 200 day moving average on the index. So let's have a look here at the S&P 500 index. And the Golden Cross is when the 50 day moving average crosses above the 200 day moving average. And you can see that on the chart here. So the Golden Cross happened in July, was it that July? Let's have a look. Yeah, early July of 2020. And that signaled that the market was now in a bullish phase. And then the death cross is the opposite. It's when the 50 day moving average crosses below the 200 day moving average on the daily chart. And you can see that the death cross happened up here and that signaled the end of the bull market. So the Golden Cross death cross is a good way to isolate bullish and bearish market regimes. It's not perfect, but it's a pretty solid technical signal. And if you add this as a filter, overlaying your swing trading strategy or your trend trading strategy, then it can really help tilt the odds in your favor, because it's going to keep you on the long side in bullish market conditions and on the short side in bearish market conditions. So the Golden Cross trading and Bearish. Sorry, the Golden Cross and the Death Cross trading signals are not really signals I would use on their own, but they're good filtering signals, and they're, they're good filters that you can add to your backtest to see if they improve your trading strategy.

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