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Moving Averages

There are three ways we will suggest you can use moving averages for determining trends.

  • Simple Moving Average
  • Moving Average Crossover
  • Moving Average Gradient

 

Simple Moving Average

When price is above the moving average you are bullish; when price is below the moving average you are bearish.

Using the S&P 500 weekly chart, we have added the 100 week simple moving average as an example. Once price breaks the moving average convincingly to the other side it remains there for a prolonged period.

The trend is bullish if price is above the simple moving average

The trend is bearish if price is below the simple moving average

 

Crossover

Take two different moving averages, and when the shorter one crosses above the longer one you are bullish, when the shorter one crosses below the longer one you are bearish.

Using the 25 and 50 weekly simple moving averages, once the 25 sma (red line) crosses below the 50 sma (green line), or visa versa, the trend remains for a prolonged period of time.

The trend is bullish if the smaller moving average crosses above the longer moving average

The trend is bearish if the smaller moving average crosses below the longer moving average

 

Moving Average Gradient

The moving average gradient indicator is better suited to a trader who trades a large market, like several hundred stocks. It filters out stocks that aren’t in a current strong trend and is well suited to someone who has scanning capabilities.

If the moving average slopes above a certain gradient it is trending.

This chart has the 40 week simple moving average and the ATR (10) added. ATR stands for Average True Range and averages out the range of price over the last 10 weeks; it is a measure of volatility. The stronger price is trending, the steeper will be the slope of the moving average, which we call the gradient.

The gradient is measured on this chart by taking the current 40 SMA (we picked a random point which was measuring 966) and deducting the 40 SMA from 10 weeks ago (926). If the difference (40) is greater than the current ATR (10) reading (26.7), then the trends gradient is sufficient to call this market bullish.

At the period circled in red, the gradient of the trend flattened to less than that of the ATR (10) and was therefore not trending.

The trend is bullish if the gradient of the trend is up and is greater than the current volatility

The trend is bearish if the gradient of the trend is down and is greater than the current volatility

 

 

Move on to Step 4 - Module 2 > Trading System Builder Tool Kit: Trading Rules > Trend: MACD

 

  

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