Many traders who are just starting out have a strong belief that profitable swing trading strategies must be complex.
But this is simply not the case…
There’s no correlation between complex swing trading strategies and profitability.
In fact, you may have already seen some of my videos where I demonstrate how simple strategies can be as profitable — if not more — than complex strategies that take weeks or months to figure out.
Case in point, the exponential moving average is a quality, simple indicator that anyone can use as a strategy for profitable swing trades…
Profitable Swing Trade Strategies: The Exponential Moving Average
Now, I’m a victim of this as well…
But needless to say, the only thing I learned from complex strategies is to keep things as simple as possible.
So I’m going to show you one of the best swing trading techniques for managing risk and finding a trending market with the moving average.
This isn’t a complete strategy, but just some pieces of the puzzle to help you understand simple indicators and how useful they can be.
If you’re not familiar with moving averages, they’re the most-used indicator for profitable swing trading strategies out there.
The moving average (MA) is a simple tool that helps traders first define the trend and, second, to recognize changes in the trend.
The simple moving average (SMA) is calculated by adding together the closing price for the entire period of data you want to use, and then dividing that amount by the total amount of days you use.
For example, if you want to calculate the SMA for the past five trading days, you would add up the closing prices and divide that number by five.
Luckily for us, every technical analysis program has the MA built in. So we don’t have to calculate anything by hand if we don’t want to.
Now, there are various types of moving averages. Some measure the average of the high and low prices while others measure the closing price. Advanced formulas will even put more weight toward more recent price data than older numbers.
This type of MA is called the exponential moving average, (EMA) and it’s the profitable swing trading strategy we’ll discuss today.
The major advantage of using the EMA over the SMA is responsiveness.
The EMA is substantially more responsive then the SMA because its formula puts more weight on more recent price data, while the SMA puts an equal weight to all data in the range.
The Moving Average Is a Flexible Indicator
There are two primary functions that the 40-day exponential moving average helps me with…
The first is to make sure the market is trending. You may recall from earlier tutorials that my advice is to look at the slope of the market. If it’s sloping greater than 20% either up or down, it qualifies as a trending market.
The 40-day EMA can be used as a replacement for the 20 degree visual analysis.
If you analyze a stock and see it trading strongly above or below the 40-day EMA, odds are the stock or any other market you’re analyzing is trending strongly either up or down.
Let’s take a look at a few examples so you can get a feel for analyzing stocks using the 40-day EMA.
The second reason why many professional traders, including myself, use the 40-day EMA is because it can be used as a risk indicator, or a stop-loss indicator when stocks or other markets are beginning to move away from the trend.
Let me give you a few examples so you can see what I’m talking about…
Both examples demonstrate the benefit of using the exponential moving average to determine trends and/or stop-loss risk levels.
This indicator is one of the most important things for profitable swing trading strategies, and short-term trading in general.
I’ve also created several other articles to help you learn about different trading indicators such as A Beginner’s Guide to Stock Sector Analysis and Relative Strength and 1 Day Trading Indicator That Actually Works: The U-Turn Pattern.
All the best,
Roger Scott
Senior Strategist, WealthPress
