Foundations of Trading: A Trader’s Journey [Part 4]

Welcome to part four of our blog series: A Trader's Journey, where we are covering the first tier of the Foundations of Trading class program. Today's blog will cover the teachings in class 4, and if you wish to review our previous blogs regarding this class, please click on the Foundations of Trading blog category on the right-hand side of the page. That will instantly bring up all the blogs from this series for you to read. As for today's topic, we are going to cover using indicators to simplify your workload.

A technical analysis indicator is a mathematical calculation that signals support for entry and exit points of a trade. Indicators as a whole are typically only used as a minor factor for getting in and out of a trade; however, they are a strong supporting force when accompanying other candlestick chart data such as support and resistance lines. One of the most beneficial indicators is the exponential moving average.

Around TradeSmart, we tend to set three exponential moving average lines on our candlestick charts: the ten-day moving average, the twenty-day moving average, and the fifty-day moving average. The exponential moving average lines can confirm when a trend is happening. For example, if the price of a stock is below all three moving average lines, then the stock is dropping in price and trending bearish. If the price of a stock is above all three moving average lines, then the stock is rising in price and trending bullish. However, if the price of the stock is in or around the moving average lines, then the stock is trending sideways with no real trend to trade.

Moving averages can even help you find trades using the Golden Cross strategy. However, instead of using ten, twenty, and fifty-day moving averages, you will want to set them to one hundred and two hundred days. Plus, make sure you are using simple moving averages instead of exponential moving average lines on our candlestick charts. You will want to look for stocks where the one hundred simple moving average is crossing over the two hundred simple moving average. Please see the example below, as the areas circled in gold are where a golden cross has occurred.

Checking to see where the stock falls in line with your EMAs is a great way to confirm a trend. Still, the primary philosophy behind using the exponential moving average comes into play when the lines of the EMA cross as the crossing lines can be a strong signal to buy or sell. Again, you should avoid using exponential moving averages as your only signal to get into and out of trades, but you can use them as a great confirmation signal to enter and exit your trades.

Thank you for reading! That wraps up our coverage of class four. Join us next week where we dive into class five and talk about stops.