Trading with Moving Averages in Mind | Podcast Episode #226

0:07
Hey, I’m Ryan Mallory and this is my Swing Trading the Stock Market podcast. I’m here to teach you how to trade in a complex ever-changing, world of finance, learn what it means to trade profitably and consistently managing risk, avoiding the pitfalls of trading. And most importantly, to let those winners run wild, you can succeed at the stock market and I’m ready to show you how, hey, everybody, this is Ryan Mallory with Swing Trading the Stock Market, and I got a good show for you guys here.

0:34
Today, we’re going to talk about trading with averages what are the moving averages that I use? How do I incorporate them into my trading? And this comes via email from a person that wants to be called Nellie. He says hello Ryan. Mallory, my husband and I love your podcast and daily.

0:51
Check your Patreon for insights into the stock market. You don’t know what Patreon is, that’s swingtradingthestockmarket.com. That’s where I provide you guys, all with my market research, each and every day, you can also get it on YouTube as well by just clicking the join button down below this video. No, it continues to write.

1:07
As I listened to your podcast and review your charts, I notice that you have multiple moving averages. What is your personal outlook on? When to go long when a stock is under your simple moving average? If the analysis, look good, would you buy a stock that was under the 200-day? Simple moving average. The market is very volatile right now and would like your perspective on how to use, simple moving averages combined with price and volume action.

1:31
If it makes it to your podcast, please use my name Nelly, it was my G name and she hated it so much that she’ll the shortened it to N. That’s some serious trolling right there to do that your grandmother, by the way. But good email. Good question. And we’re going to talk about a whole bunch of that kind of stuff regarding moving averages, I have a lot to say about that first.

1:48
What am I drinking? I’m drinking some Kentucky owl confiscated bourbon whiskey. It’s a higher price bourbon. I spent about $100 on this one. I wasn’t too crazy about that was like one of my resolutions this year. I don’t want to spend a lot of money on bourbon, you know, in terms of like going way off the charts, kind of pushing it with that one.

2:05
I know they get even more expensive than that but really good look to it. I mean nice color, you know, beautiful to the nose. You can pick up like some caramel sweet flavors. It’s definitely kind of like a sweet kick to it at first and then it hits you with a nice strong finish.

2:22
It’s not overwhelming, it’s not too much. It’s not a disgusting finished. You know, you have a lot of bourbon still have a hot finish but it’s really nasty. It’s like you’re needing to eat a banana afterwards. Just to cleanse your palate, not like this one. It’s actually a very, very pleasant heat that comes on. Nice sweetness.

2:38
And what I like about it is that it balances, that sweetness in the heat, that comes thereafter. So between the taste and the finish is balanced. Really? Nice, that you get to enjoy the taste, you get to enjoy the finish and they complement each other really good. It’s not everyday separate. It’s $100.

2:53
I don’t want to spend that much money on it every day sober and it’s 48.2% alcohol. 96.4 proof, I always liked it over 50 or right at that 50 mark. This one’s just a shade below give a little bit of forgiveness for that scale of 0 to 10. I’m going to give it like a 8.4.

3:11
Yeah. I mean, it’s good it’s really good. I liked it a lot. I think it’s a solid solid. Even if you’re wanting to impress friends, or if you’re just wanting to enjoy something special, Kentucky owl confiscated in 1916 as what it’s called straight bourbon whiskey, I got at Costco, pretty good.

3:27
I don’t think it’s going to be something that they’re going to be carrying all the time. So I went ahead and took the opportunity while I could don’t think was necessarily a great deal for it. I saw the same price at Total Wine. So, anyways, back to the email about simple moving average because we don’t want to lose sight of the main thing. Here in the main thing is, the simple moving averages, answering your emails a lot.

3:46
Of podcasts, they will have guests on their shows and most of them do. My goal is to make you guys the guests by answering your questions on an almost every episode basis. So for those who don’t know what a moving average is, moving averages basically smooth out a stock’s price action over a specific timeframe.

4:03
So a 10-day moving average would take the average closing price of the last 10 days. Now it changes every day because every day you have a new trading session, which means you’re adding a new day and you’re dropping the oldest day off out of the equation. So if the stock continues to progress higher that moving average is going to continue to press higher as well.

4:19
So 10-day moving average is going to be more of your short-term time frame. It’s just like a 5-day moving average. 50-day moving average is going to be more of like an intermediate time frame and stuff like your 200-day moving averages are going to be more of your long term moving averages. Now it doesn’t just apply to daily charts.

4:35
You can have a 200-minute moving average or you can have a 200 it’s probably best to call them 200-periods because if you’re using it on a five-minute chart or a chart, the moving averages are going to be different depending on what time frame you’re on. You can also use it on multi-day charts like the weekly or the monthly or even yearly and they’re really fascinating to look at because you can see, especially like with the weekly, there’s all sorts of tendencies for the market to bounce.

5:00
Off of specific moving averages over time. When you’re looking at candlestick price action on a chart, you can get a lot of choppiness, right? I mean, you can see a stock where it’s going up 5% one day, down 5%, up 4, down 4, down 7, up 8. And you start to say, okay, this thing’s all over the place.

5:17
But if you start looking at the moving averages, you can see, okay, over time, with all this noise, with all the day-to-day theatrics, is the stock trending higher, is it trending lower? And you get a good feel for how it’s actually behaving when you can take out a little bit of the day-to-day noise by just simply looking at a moving average. For me,

5:34
I use the 5-day moving average, the 10, the 20, the 50, the 200-day moving average. I could add more, I can add like the 100-day moving average. The reason why I don’t is because then you start to see your charts get really cluttered and moving averages are a great way to do that.

5:49
You start doing some trend lines on there. You throw in like a Bollinger Band overlay, which I only use Bollinger Bands in specific situations, I don’t keep them on there all the time. But you can imagine somebody that does. Plus, you’re throwing in the moving averages, your trend line analysis, and everything else, it can get really messy.

6:08
So I keep it to those five moving averages. I think they’re probably the most popular ones. And the reason why I go with the most popular ones is because moving averages are going to show herd mentality. So there’s a lot of people that will buy stocks right off of the 20-day moving average or off the 200-day moving average.

6:25
And so the popular ones are the ones that are most likely to do that with. If I choose something like the 27-day moving average, there probably wouldn’t be as much price action using just those moving averages. There is some, but I like it more when I’m doing the ones that are very popular. Now there’s also exponential moving averages, which give more weight to the most recent price action versus the oldest price action on the moving

6:46
average. And then you have simple moving average that just weights it all out the same. I use simple moving average again for the same reason that I use the 5, 10, 20, 50, and 200-day moving averages because it’s the most popular form of moving averages. And so that’s where most people and where you’re going to see most of the algorithms start to trade off of. And in a sense,

7:05
you can see there’s a psychological effect there that’s worth taking advantage of. Now there’s other popular ones. I said there’s like the 100-day moving average. I’ve seen people talk about the 125-day moving average. All of them are legitimate and you can use them. But at some point you got to kind of say, okay,

7:20
if I’m going to throw the 100 on there, maybe I don’t care too much about the 200-day moving average or maybe it’s the 50 or the 5-day moving average. Not saying that you can’t, just saying that you’re cluttering up your chart. You’re adding a lot more noise. Every line is another layer of noise on your charts and I like to keep it as simple as possible. I like to keep the clutter off of my charts as much as possible.

7:38
If you look at my charts that I post on StockTwits or with swingtradingthestockmarket.com or on SharePlanner itself, you’re going to see that almost based on all the charts, it’s very, very simplified, man. And I even get criticized for it. It’s like, oh, he just draws one line on there. Well, sometimes one line is all I need to draw on there to get my point across.

7:53
If there’s a trend line, I’m not going to clutter it up with a whole bunch of lines just to make it look like the chart’s more important than what it really is. If I can prove a point with one line, I will do it. A lot of people get excited about the crossovers too. You hear about the death cross, the golden cross.

8:09
That’s like where the 50-day moving average crosses the 200-day moving average. Death cross is to the downside. Golden cross is if it crosses it to the upside, meaning the 50-day moving average moves up and through the 200-day moving average. That’s the golden cross. If the 50-day moving average moves below the 200-day moving average at the moment that it does that, that’s your death cross.

8:27
And here’s the thing. Anytime we have one of these death crosses, and we’ve had some recently here, people get all excited about it. It’s like, oh, we got the death cross, and people are like, oh, we gotta get short on this stock, or we gotta get long on it. But here’s the thing though, is a lot of times there will be signals far earlier in a stock’s price action to get short or to get long than waiting

8:45
these death crosses or golden crosses to happen because ultimately these crosses are lagging overall market price action. So you might say to yourself, no, no, it’s so reliable. Yes, there’s times where you short the death cross on a stock and the stock continues to go down and you feel like it proves your point.

9:03
But what I would tell you on that is that what’s making it cross? It’s the price action. The price action is what’s causing and what’s creating the death cross, or the golden cross, or any kind of moving average cross. Some people like to play like the 3 and the 8 moving average cross. I’ve never even tried it before. Not saying that there isn’t some legitimacy to it or some valid arguments for using it. From a swing trading standpoint,

9:25
I’ve never tried it before. But I can tell you for the most part, your moving averages are lagging overall market price action. So it might have already had a nice base, broken out of that base, maybe even bull-flagged and broken out of that before you get these confirmations from the death cross or the golden cross.

9:45
Because ultimately it’s the price action that’s driving that 50-day moving average to curve through the 200-day moving average to create the death cross, and it’s the price action that’s rising that’s pulling up the 50-day moving average to cross through the 200-day moving average to create the golden cross. Because you’re never going to have a death cross when the stock market’s going through the roof. If the stock market’s continuing to put in all-time highs each and every day, mathematically, it’s impossible for there to be a death cross because when there’s a strong trend in place, the moving averages in the short term are always going to be much more steeper than the longer term moving averages.

10:12
So the 5-day moving average will be almost like a vertical line in a strong uptrend, where the 200-day moving average just might be, you know, plodding along. So again, I don’t care about the moving average crossovers. Now another thing that’s said a lot about the moving averages is, oh, when price is above the 200-day moving average, you should be bullish.

10:29
If the price is below the 200-day moving average, you should be bearish. Well, when you’ve been in an established uptrend for a very long time, it can mean like the difference of like a 10 or a 15 percent pullback just to get you below the 200-day moving average. You’ve seen that with the S&P 500 for quite some time.

10:45
At some point it was like there was like it would require more than a 20 percent correction just to get below the 200-day moving average and that wasn’t going to happen anytime soon. Now we’re below the 200-day moving average and people are flipping out, but just to get bearish at that point now, because you can have massive topping patterns, and we’re seeing it right now with like Microsoft and we were seeing them with Facebook before its earnings

11:05
even, where stocks will put together some nice topping patterns and the break of the 200-day moving average happens much later. So if you’re basing your bullish outlook or bearish outlook on whether you should be bullish or bearish on stocks, again, you’re lagging overall price action.

11:22
What’s already happened to get below the 200-day moving average? Prices have to already have dropped substantially. And vice versa, to get back above it, prices have to have rallied substantially. Is trading below the 200-day moving average associated with a bearish stock market?

11:38
Yes. And is it bullish to be above the 200-day moving average? Yes. But it’s also bullish to be above the 5-day moving average and bearish to be below the 5-day moving average. It’s all depending on the time frame that you’re looking at here. I’ve gotten out of trades before because we do break below the 5-day moving average, and there was a history of a stock bouncing consistently off of that 5-day moving average, but once it closed below the 5-day moving average I got out of it.

12:00
Now the stock could have kept going up higher, you know, a week down the road or something. But at that moment in time I felt like okay, the stock is getting a little bit more bearish, people are starting to take their profits in a more aggressive manner so I’m going to go ahead and get out. So moving averages can actually work in so many different ways, in so many different fashions. For me,

12:18
I really just care about the moving averages when the stock chart cares about the moving average. So if we see a chart for, on let’s say Apple, and let’s say Apple consistently is blowing through the 200-day moving average and then rolling right back up through the 200-day moving average, dropping back below it, right back above it, am I going to care about the 200-day moving average?

12:34
No, because the stock doesn’t care about it. So why would I care about it? Why would I put importance on the 200-day moving average if the stock is putting zero emphasis on it? I’m not. So it will not even factor into my trading decisions at all.

12:50
Now if I see where Apple, time and time again over the past year, pulls back to the 200-day moving average and bounces right off of it and goes back up to all-time highs, and I see that happen like three or four times or five or six times even, yeah, pulls back down there again, I’m going to be very tempted to go buy the stock off of that 200-day moving average because it’s shown a consistent behavior at bouncing off of that moving average that

13:06
continues to support the stock at that level. But if it doesn’t show it and it just goes up and down below it, I’m not going to care. We saw that for a while with the S&P 500 and the 50-day moving average while the market was on a huge tear last year, it consistently bounced off of that 50-day moving average. But now it doesn’t even care about it.

13:22
And now it doesn’t care about the 200-day moving average either. At first I thought, okay, when it tests that 200-day moving average, I’m going to put some weight on it. I’m going to see what it does because I would not discount it bouncing off the 200-day moving average like it used to do with the 50-day moving average.

13:39
But once it showed, you know, especially even over the last five days of trading this is February 2022 we’ve seen plenty of times this month where it goes above and below the 200-day moving average and doesn’t give a rip about it.

13:57
So the question that Nelly asks in this podcast is, would you buy a stock that has a good trade setup but is trading below the 200-day moving average? Absolutely. In fact, some of the best setups can happen that way because oftentimes it can be the result of a massive pullback that has taken place, there’s a good base that’s formed, and it’s starting to pull out of that base and it’s giving you an opportunity to get long on that stock.

14:17
Now as it breaks out of that stock, let’s say I get into it and it approaches the 200-day moving average. If I’ve seen multiple attempts in the past where it hits that 200-day moving average and then sells back off, okay, that’s going to be something that I watch. Okay? If I see it hit the 200-day moving average, maybe it sneaks above it for a little bit intraday but then it pulls back and closes below with a big heavy red candle, I’m probably going to get out of that stock.

14:39
Okay, I’m probably going to go ahead and close and say, hey, it’s acting consistent with what it’s done in the past, there’s no need for me to hold on to it any longer. But that’s only if there’s a history with that moving average and that doesn’t have to be just with the 200-day moving average it can be with the 20, 50, any of them that you use that works for you as a trader in terms of ones that you include on your chart.

14:59
Then yeah, if there’s a history with that moving average, pay attention to it. I always tell people, technical analysis isn’t supposed to be a crystal ball. It isn’t supposed to tell you what the stock is going to do next. What technical analysis is supposed to do is to provide you guidance, to provide you with an understanding of a stock’s behavior.

15:15
I always tell people, support levels are meant to be broken just as much as they are meant to be held. If a support level breaks, don’t take offense to it. That’s part of trading. That’s part of price action. Ask yourself, what is that break of that support level trying to tell you? And the same thing with moving averages. What is the break of the moving average?

15:33
If it’s been a consistent level of support in the past, what is that moving average telling you now that it’s finally broken it? For me sometimes, like with the 5-day moving average, there’s no support nearby. So I will use something like a 5-day or a 10-day moving average that it has consistently bounced off of and held throughout the course of a particular rally.

15:49
And it can be a very short-term rally, and I’ll use that as a way to move up my stop loss. I’ll keep my stop loss below it and then once it closes below that moving average, if I haven’t been stopped out yet, I’m going ahead and closing out the trade. So to answer Nelly’s question about the moving averages and taking trades to the long side when the stock’s trading below their moving average,

16:09
absolutely. And above the moving average, watch your stock. Sure. It’s not often you see head and shoulders pattern below the 200-day moving average or inverse. It does happen, trust me, it does. But I’m just saying that some of the best head and shoulders patterns are going to happen when the stock is trading above its 200-day moving average unless it’s a very long drawn-out head and shoulders pattern where it’s been marred by sideways trading, kind of like what you see with Amazon over the last 18 months, then

16:33
yeah, your 200-day moving average is going to catch up with all the other moving averages and it’s going to be right there near current price action. So in volatile markets, in very volatile markets and so far here in 2022 it’s been a very volatile market and we’re seeing multi-percentage point moves on a day-to-day basis.

16:50
I mean, I remember during the summer, sometimes you’ll go like one or two months, you won’t see a full 1% move in the stock market. And you’ll even see ranges that go on for a very long time less than 1%. Right now, we’re seeing 2 and 3 percent moves on a number of these indices. And so when there’s a lot of volatility, it’s easy for price action just to completely ignore the moving averages.

17:10
Just blow right through them. Now, in a very trending market, price action will oftentimes respect a moving average. Or maybe not all of them, but you can usually find like maybe it’s the 50 or maybe it’s the 20 or maybe it’s the 10 but you will find a lot of times moving averages that are respected by price action.

17:26
But in volatile markets, where you’re seeing like these 1% days higher and lower and higher and lower, there’s a good chance it’s just going to blow right through those moving averages. So I wouldn’t put too much emphasis on it. Remember, takeaway from all this moving averages are really good, they’re really great for helping you smooth out price action, seeing where the trends are going.

17:45
But like any indicator, they’re not a perfect tool for a trader. There’s pros and cons to them. They often lag price action overall. Things like the death cross and golden cross I wouldn’t put too much emphasis on them or most crossovers in general. And remember and this is probably the most important takeaway moving averages are important

18:02
if the stock deems it important. If the stock shows, hey, I continue to bounce off of this 50-day moving average every time, when the stock pulls back to that 50-day moving average, it’s important to watch that. If you enjoyed this podcast episode, I’d encourage you to like and subscribe if you’re watching on YouTube or if you’re watching it on Spotify or any other platform. Please make sure to leave a five-star review and continue to send your questions to me at ryan@shareplanner.com.

18:25
I read all of them and I try to include as many of these things in podcasts. The majority of them actually get on, believe it or not. So make sure you do that. Check out swingtradingthestockmarket.com or simply click Join below if you’re watching on YouTube. Thank you guys and God bless.

18:40
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18:56
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