A Relatively Strong Moving Average Combination for Day Trading

Day traders need continuous feedback on short-term price action to make lightning-fast buy and sell decisions. Intraday bars wrapped in multiple moving averages serve this purpose, allowing quick analysis that highlights current risks (as well as the most advantageous entries and exits). These averages work as macro filters as well, telling the observant trader the best times to stand aside and wait for more favorable conditions.

Choosing the right moving averages adds reliability to all technically-based day trading strategies, while poor or misaligned settings undermine otherwise profitable approaches. In most cases, identical settings will work in all short-term time frames, allowing the trader to make needed adjustments through the chart's length alone.

Given this uniformity, an identical set of moving averages will work for scalping techniques—as well as for buying in the morning and selling in the afternoon. The trader reacts to different holding periods using the charting length alone, with scalpers focusing on one-minute charts, while traditional day traders examine five-minute and 15-minute charts. This process even extends into overnight holds, allowing swing traders to use those averages on a 60-minute chart.

5-8-13 Moving Averages

The combination of five, eight, and 13-bar simple moving averages (SMAs) offers a relatively strong fit for day trading strategies. These are Fibonacci-tuned settings that have withstood the test of time, but interpretive skills are required to use the settings appropriately. It's a visual process—examining relative relationships between moving averages and price—as well as moving average slopes that reflect subtle shifts in short-term momentum.

Increases in observed momentum offer buying opportunities for day traders, while decreases in momentum may signal timely exits. Decreases that trigger bearish moving average crossovers in multiple time frames offer short sale opportunities, with profitable sales covered when moving averages start to turn higher. The process also identifies sideways markets, telling the day trader to stand aside when intraday trending is weak and profitable opportunities are limited.

Examples Using Moving Averages

Invesco QQ Trust (QQQ), signaled a trend reversal using the 5-8-13 bar SMAs, as illustrated in (A) in the line chart above. Later on during the trading session, around the lunch hour, there was a test of the uptrend as seen in (B). The test did not result in a reversal and the ETF continued to rise
towards the mid-afternoon trading session.

At (C), the 5-8-13 bar SMAs signaled a pause in trend. This lasted until the end of the trading session. At the new trading session, (D), the uptrend resumed until another pause occurred at (E) during the lunch hour.

The first leg of the uptrend, (A) to (C), lasted 51, 5 minute bars and generated 2.59 points or 0.79%, without adding spreads and commissions. The second leg of the uptrend, (D) to (E), lasted 35 bars and created 2.64 points or 0.8%, without adding spreads and commissions.

Signals to Stand Aside

Interrelationships between price and moving averages also signal periods of adverse opportunity-cost when speculative capital should be preserved. Trend-less markets and periods of high volatility will force five, eight, and 13-bar SMAs into large-scale whipsaws, with horizontal orientation and frequent crossovers telling observant traders to sit on their hands.

Trading ranges expand in volatile markets and contract in trend-less markets. In both cases, moving averages will show similar characteristics that advise caution with day trading positions. These defensive attributes should be committed to memory and utilized as an overriding filter for short-term strategies because they have an outsized impact on the profit and loss statement.

At (C), QQQ bobs and weaves through an afternoon session in a choppy and volatile pattern, with price whipping back and forth in approximate one-point range. The respective SMAs shows similar whipsaws, with multiple crossovers but little alignment between moving averages. These high noise levels warn the observant day trader to pull up stakes and move on to another security.

The Bottom Line

There is no perfect set of moving averages. The 5, 8, and 13-bar simple moving averages do offer relatively strong inputs for day traders seeking an edge in trading the market from both the long and short sides. Also, this technique works well as filters, telling fast-fingered market players when risk is too high for intraday entries. Nonetheless, individuals seeking alpha should also consider other simple moving average parameters and even other technical analysis indicators.