22 Feb 2010
Moving averages for entry and exit points

Hello and welcome to CantosCharts Masterclass. I'm Sandy Jadeja, Chief Market Strategist for CMS FX.

Welcome to another educational and informational lessons. I hope you've been enjoying the recent educational series that we've been teaching you and of course recently we've started on the moving averages.

As of course, everything is simply for information purposes only, I am not going to be giving you very specific advice as to what to do in the current market environment, but we will be taking a look at current charts.

Now we've discussed moving averages in the previous lesson so I'm going to continue here in teaching you a very specific entry and exit method and of course, the different varieties of using moving averages.

So moving averages can be used with many different settings as well as alternative waves.

So here, for example, this is a chart of a market with two moving averages. So what does this actually tell us? Well in this particular example I've used a 10- period and a 20-period moving average. Now, notice over here in this region, I've got a blue arrow and that's where the moving average actually cross. So the 10-period, which is referenced as the shorter term moving average, has crossed over the intermediate term moving average which is the 20-period and that would indicate a buy signal.

So as soon as the market has closed above the moving average on the green moving average and of course the cross, that would indicate an entry point. We would stay with this position until we get to this point here where we can see the green line crossing below the red line. So in other words, the short-term moving average has crossed over the intermediate term moving average and that would indicate an exit point.

So in this example here we have a gain of 486 points and that's quite a nice trade. We could also say since the moving average has crossed over we could potentially go short here, but I'll highlight that in a couple of minutes' time.

This example here we have again two moving averages, but I've changed the timeframe. In other words, the daily chart is now using a 5-period and a 10- period moving average. So I've really zoned this down right down to lower timescales in the moving average area. But it's exactly the same chart, but in this example here we have a gain of 595 points. So does that mean by changing the settings we can get better results? Technically yes, but that's quite difficult to really administer because you could spend a lifetime trying to find the ultimate setting in the moving average periods.

This example here we've used three moving averages. I've used a short-term, an intermediate term and a longer term. Some traders prefer to trade with three moving averages. But again, it's exactly the same chart, but notice that we get a later entry signal and, of course, we get an exit signal just over here indicated by the right arrow. In this example, we have a gain of 296 points.

So you can see by using a number of moving averages gives us different entry and exit points. Some people like to be longer-term traders and they might want to use the three moving averages and some people just like to keep it really simple and take two moving averages.

In this example here, what are we looking at? Well we can see straight away that there are multiple entries on this daily chart. The blue arrows indicate an entry to go long and the red arrows indicate a short position or an exit. So we would have an entry on the first blue arrow and an exit on the first arrow. We would have a second entry on the blue arrow again and a second exit. So therefore, we have had multiple entries and exits here. We could have gone long, we could have gone short. Is that really a good way to trade? I think not.

In this example here I'm showing you the same market but on a weekly chart and notice that we've only got one entry signal indicated by the blue arrow. So as soon as this market has closed above the moving average, that would indicate a long entry. As soon as it has closed below the moving average, that would indicate we would want to exit this position.

If you're a longer-term trader you could simply use the weekly charts to enter and exit this particular market. But if I go back to this particular slide here, what we would have done is actually only have traded the buy signals and completely ignored the sell signals and this is how you trade correctly with this particular method.

So in other words, you look at the weekly chart for the longer-term trend and you would use your daily chart for your entries and exits. So if the market is bullish, only take long signals and if the market is bearish, only take short signals.

So I'm going to give you some important rules.

Determine your timeframe. In other words, are you a short-term, intermediate term or a longer-term trader?

Then, choose a suitable time period of moving averages for your timeframe. So if you're short-term, you might want to consider 5 to 10-period moving averages. If you're intermediate, then you would be looking at the 20, possibly even the 30 and for longer term, 50 and the 100s are quite commonly used.

Then determine what is the dominate trend. Is it bullish or bearish? Once you determine the dominant trend you will then only take signals within that major trend. If the trend is up, take buy signals and ignore all sell signals. If the trend is down, take all sell signals and ignore all buy signals and then of course always use stop loss orders in order to protect your position.

Remember that there will always be an alternative way to trade with the moving average and in the next educational lesson I want to teach you a very unique way to look at moving averages which can actually result in some very, very good profitable opportunities that will be coming up in the financial markets over the coming months.

I hope you've enjoyed this educational lesson. This is Sandy Jadeja for CantosCharts Masterclass.