How to Use the Moving Averages
- Rohit Musale, CFA
- Mar 2
- 2 min read
I use 5 moving averages on the daily timeframe chart.
- 8 EMA
- 21 EMA
- 50 SMA
- 150 SMA
- 200 SMA
I use 1 moving average on the weekly timeframe chart.
- 10 SMA
I use moving averages for:
- Filtering
- Risk Management
- Trade Management
- Pyramiding
1) Filtering
I use the following formula for identifying confirmed Stage 2 up-trending stocks on the daily timeframe chart.
50 SMA > 150 SMA > 200 SMA
For more precision, I demand that all three moving averages be sloping upwards.
Slope = MA value of current candle - MA value of previous candle.
Positive slope = Sloping upwards
On the weekly chart, I want the 10 week SMA to be sloping upwards.
2) Risk Management
I check which are the moving averages present between my
- Entry price
- Stop loss
Example:
- 8 EMA
- 21 EMA
Those 2 moving averages now become my mental stop loss levels.
As long as the price remains above these moving averages, the trade is doing what it is expected to do.
As soon as any of these moving averages crosses my breakeven point, I might gradually start moving my hard stop loss towards the breakeven.
The magnitude of the movement of stop loss in upward direction depends on the market condition.
If the market is weak, the SL movement will be aggressive.
If the market is strong, the SL movement will be conservative or non-existent.
3) Trade Management
On the daily timeframe chart, I keep an eye on the
- 8 EMA
- 21 EMA
- 50 SMA
For positional trades, a break of 50 SMA means, I will close the position.
For swing trades, a break of 21 EMA means, I will close the position.
A break of 8 EMA warrants reduction in position size if the market condition is weak.
A high volume break of any moving average is more risky than a low volume break of the same moving average.
For volume, I use the 50 SMA on the daily timeframe chart and 10 week SMA on the weekly timeframe chart.
In good market conditions, I might ignore the low volume breaks of the moving averages.
In bad market conditions, I might close the entire position even on a break of 8 EMA irrespective of whether its a swing or positional trade.
4) Pyramiding
I am likely to scale into an existing position only if the stock is fundamentally strong and:
has moved up at least double digit percent from my breakeven point.
A bounce off the 21 EMA and 50 SMA are good entry points.
I do this less often.
I never do this on losing positions.
I only do this when the market conditions are strong.
Regards,
Rohit Musale, CFA
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