08/28/2018 | by Brad Ritter

Trading Trendlines with Moving Average Confirmations

BlogTrendSpider StrategiesTrading Trendlines with Moving Average Confirmations

One of the main things to remember when trading is that using an approach that utilizes multiple confirmation signals is generally the best way to go for statistical significance purposes (the more confirmations, the less chance of a false signal). One of the most popular ways to find confirmations on the chart is through moving average signals that occur when two moving averages cross either to the upside or downside (the shorter-term moving average creates the cross). These signals are important for a number of reasons and will be explored more in the following sections. We will also explore one of TrendSpider’s most valuable features which helps traders use their time more efficiently when the market is open.

What are Moving Averages?

Simple Moving Average (SMA)

As there are a number of different moving averages, in its most simple form, a simple moving average is an average of a stock’s daily closing price over X amount of days. For example, if you wanted to see the 20-day simple moving average, you would take the closing prices of the last 20 days, adding them together, and then dividing by 20 (each day is given equal weight in the equation). This will give you the value for the current period you are looking at (in this case, the daily candle). Moving averages can be incredibly useful, especially considering they are so widely used by the rest of the trading community.

$SPY chart with the simple moving average. — This image shows the simple moving average on a chart of $SPY and how it is calculated. The yellow box in the top left corner shows how you can identify which moving average you are looking at on the TrendSpider platform.

Exponential Moving Average (EMA)

The exponential average is slightly different in the sense that the more recent price action has a higher weight in the equation (remember the SMA, each day in the 20 days was an equal weight). The equation is explained in the image below.

A chart showing the EMA vs. the SMA for the same time period (50 days). — This image shows the EMA vs. the SMA for the same time period (50 days). Notice how the EMA moves more with recent price action.

Moving Average Signals: SMA vs. EMA

When looking for moving average signals, each strategy will be slightly different based on how the trader executes their strategy. In general, a moving average signal occurs between two moving averages, not one. This occurs when the shorter-term moving average (or faster) crosses the longer-term (or slower) moving average (for example the shorter-term SMA (20) vs. the longer-term SMA (50)). This type of move signals that the latest price movement over the shorter period of time has been significant enough to increase the short-term average price enough to interact with longer-term price levels.

A chart showing the short-term SMA (50) moving average crossing the longer-term SMA (100). — This image shows the short-term SMA (50) moving average crossing the longer-term SMA (100).

A timestamp after this chart was created showing an approximately 13% move up in price after the moving average cross.

As mentioned in the previous section, the EMA generally will move quicker than the SMA due to the way the equation is set up. For this reason, when the EMA does cross the SMA to the upside or the downside, it is a big deal and is generally on many traders’ radars. These types of moves become self-fulfilling due to the amount of money following these signals (institutional money) when they occur.

A chart showing the EMA (50) crossing the SMA (100) to the upside. — This image shows the EMA (50) crossing the SMA (100) to the upside.

A timestamp of $IDXG after the EMA (50) crossed the SMA (100). This was a 25% appreciation in price within one month. — This image shows a timestamp after the EMA (50) crossed the SMA (100). This was a 25% appreciation in price within one month.

Steps to Utilize TrendSpider When Trading Moving Average Crosses

When trading and using these types of confirmation signals, TrendSpider is the perfect platform to use. As the trend continues to form after these signals fire, the smart algorithm will automatically find new trendlines as the user refreshes the chart. One of the easiest ways to stay on top of this is by using our alert system, which automatically catches indicator and trendline breakouts and breakdowns. This gives you more time to focus on what’s important, the actual trading. As all of our alerts are through the cloud, these trigger immediately and can be used for any trading timeframe.

Step 1: Right-Click Trendline or Indicator

The first step in creating an alert at a trendline or indicator is to right click on whatever you would like to set an alert on.

Right-click the trendline or indicator to create and alert in TrendSpider.

Step 2: Choose Settings for the Alert

A window will pop up that allows you the to create the settings for the trendline alerts.

In the yellow text, you will see a warning if you have not added a mobile number to receive alerts via text message. Click “add one” and you will be taken to the notifications window.

Settings window for alert in TrendSpider.

Step 3: Choose Notification Settings for the Alert

Once you are at the “Notifications” tab, choose from the following notification settings to personalize your alerts.

Notifications window for alert in TrendSpider.

Step 4: Mobile Settings for the Alert

In order to connect your mobile device to our alert system, simply check the box next to “SMS” and enter your phone number with the correct country code.

Mobile settings for alert in TrendSpider.