We pay people to replace our knees for us because most of us don’t know how to do it ourselves (or wouldn’t be able to stop screaming during the procedure).
We pay others to work on our cars, ever since those on-board computers made it all but impossible to change our own oil.
And some people even pay so-called “experts” to manage their money for them. It’s too complicated to handle ourselves, you see.
Maybe this is why I’ve met countless novice traders who come to me convinced — and I mean CONVINCED — that in order for a certain trading strategy to work and be profitable, it has to be complicated. It has to be so heady and confusing that they just can’t wrap their brain around it.
Otherwise it’s basic and doomed to fail.
My message to them is always the same… that’s just not true.
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There is zero correlation between complex strategies and profitability. Some of the simplest techniques I use have been as profitable, if not more profitable, than the complex strategies that take weeks or months to figure out and trade correctly.
Let’s talk about one of the easiest, most beginner-friendly trading techniques out there: the swing trade. It’s simple on the surface, but it’s also one of the most effective ways I know to manage risk and spot a trending market.
Step 1: Calculate the 40-Day Moving Average
Simple moving averages are probably the most used indicator for most swing trading stock techniques out there, and there’s a good reason for that. They’re simple to use, and are tools that help us to define trend and recognize changes in that trend.
How do you find it? Just add together the closing price for the entire period of data you want to use (in this case the last 40 days) and divide that amount by the total number of days you’re looking at (again 40).
Fortunately, every technical analysis program has the moving average built in so you don’t need to calculate anything by hand.
That’s a pro tip right there.
In this case, we want to actually calculate the exponential moving average, which puts more weight toward more recent prices than earlier prices. The major advantage of this is just responsiveness.
The exponential moving average is substantially more responsive than the simple moving average because the formula to calculate the exponential moving average puts more weight on more recent price data, while the simple moving average puts an equal weight on all data in the range.
(Calculate it? Just use your analysis program and save your calculator the work.)
Step 2: Look at the Trends
First, look at the slope of the market over those 40 days. Is it sloping greater than 20% either up or down? If so, congratulations! You have yourself there a trending market.
If you analyze a stock and see it trading strongly above or below the 40-day exponential moving average odds are it is trending strongly either up or down.
That’s a good thing for traders.
Here’s an example using Apple…
Notice how the 40-Day exponential moving average follows the overall trend in the market.
Google does the same thing in the other direction…
And here’s a bonus!
Step 3: Use the Exponential Moving Average as a Risk Manager
The second reason why many professional traders, including myself use the 40 -day exponential moving average is because it does a wonderful job when used as a risk indicator or a stop loss indicator when stocks or other markets are beginning to move away from the trend.
It’s like this…
See how that works?
When you can see the trend spread out over 40 days, it’s easy to see where to get out and where to set your stop losses. That’s some solid risk management right there.
It’s simple, it’s basic, and it’s effective.
Of course, this is just one of the techniques I use..
When I’m trading, I spend most of my time looking for patterns. It’s one thing knowing how to identify and spot a pattern as it’s developing, but it’s a totally different skillset to use that information to understand when to enter and exit the market.
It’s not like the pattern flashes “buy now!” at you (though that would be nice).
But… there is one type of pattern that gives you more information than most and can take some of the mystery out of entry points.
I love you all,