Posted in
Education
By: Tom Gentile
on October 20th, 2023
I am going to cover how one can learn how to scan for a trending move, whether it be a bullish or bearish trend. This article will discuss using only the stock with this analysis.
Trading options, for those of you who trade options, will be discussed in a future educational piece. For now, one can read this article and also view my video that correlates with this subject matter: Also found on my YouTube Channel:
Looking at a seasonal perspective in my online software tools, one could have a seen that September has a history of being a bearish month. The seasonals then show that October tends to snap back, being a bullish month.
Here we are in October, and you can see the seasonal Money Calendar data shows October could be a bullish month and looking for a bullish trend may be in order.
When I look back on myself as a trader, I think back to 1986 when I first started looking at the markets. I had my first brokerage account then, I was only 21, and knew enough to be dangerous.
After going through my first market crash (1987) and subsequently my first and only margin call / negative account balance, I realized that watching TV and following the loudest mouth on cable wasn’t the way to pick stocks.
Since then, I have curated a number of trading systems that relate to seasonal strategies, volatility strategies, contrarian strategies, and trend strategies. Today I want to talk about trending strategies, and how I look at a trend that’s both starting and ending.
Let’s talk about trend.
What is a trend?
According to Investopedia, Trend analysis is a technique used in technical analysis that attempts to predict future stock price movements based on recently observed trend data. Trend analysis uses historical data, such as price movements and trade volume, to forecast the long-term direction of market sentiment.
But what indicators are used to predict trend? There are far more indicators that look at trend than I can count, but they all have some calculation based on past price. Once you find a trend indicator that you want to use in price prediction, the next thing you need to decide is how much data do you need to properly use the indicator. Finally, you have to determine if the indicator has a pattern for profitability, because isn’t that what we all want in our portfolio?
Let’s start with something basic that I use. Averages. An average is simply a group of numbers divided by the number of numbers in a group. Ok sounds more complicated than it is so let me give you an example. Let’s say Adobe (ADBE) closed at $490, $496, $500, $504, and $510, the formula to calculate a 5-day SMA would be…
(490+ 496+ 500+ 504+ 510) =2500 ÷ 5 = 500 (the 5-day average)
To make this a moving average, you simply take the most recent 5 days every day. Anything that has data qualifies for this.
Do I use moving averages in my assessment of stocks and ETFs? Yes. But I need more than an ‘average’ to give me something to back test for profitability. Enter the MA Cross
The MA Cross, or moving average cross, is created when taking two moving averages using different days and putting them on a stock chart. The short-term MA will be more reactive than the long-term MA, and as the markets gyrate up and down, these two lines will cross.
One of the most popular of the moving average crossovers is the 50/200 day. This is widely discussed on financial networks and as the 50- day crosses above the 200-day moving average that is called a golden cross and is bullish. When the 50-day crosses below the 200-day moving average this is referred to as a death cross and is bearish.
Though I think this moving average crossover is great I see one problem. The problem as I see it is it is more suited for investors than traders. The reason why is because it’s so slow to cross that it may take months or sometimes years before you see a crossover occur with moving averages of this length.
I’m a trader so I need something shorter term.
The values I like to use are the 10- and 30-day simple moving averages. I call this the 10/30 MA crossover strategy and it works like this.
10/30 MA cross
- Bullish whenever a 10-day simple moving average crosses above a 30-day simple moving average
- Bearish whenever a 10-day simple moving average crosses below a 30-day simple moving average
Above is a recent chart of Adobe. This chart has the 10-day and 30-day Simple Moving Averages, (SMA) added to it. Notice how when the purple line crosses above the blue line that is a bullish move, and when the purple line crosses below the blue line that is a bearish move. In an uptrend such as seen with this stock you could simply take the bullish signals only and then go to cash when you get a bearish signal.
But how do you know whether something like this moving average crossover actually works in the real market? To answer this question requires becoming a rules-based trader. A rules-based trader is one who not only spots a pattern such as this one but also has the data to back test the rules to see if they actually worked or not in the past. Then after some refinement and further back testing is now ready to apply a real account to their strategy.
Next week I’m going to discuss how to back test this strategy and how to apply some rules to help filter out unwanted trades. Until then let me give you my top five crossovers for October.
Now I haven’t even begun to discuss options here… But we’ll get into more of this in future educational entries. See you then!
Tom Gentile
America’s Pattern Trader
App: Toms Option Tools
Toms Option Tools scan the markets for bullish and bearish trade opportunities using our proprietary scans and strategy algorithms. TTR Darknet finds bullish entries based on triple stack channel collisions. Money Calendar identifies seasonal patterns with at least 90% accuracy looking back 10 years. Weekly Cash Clock finds short term opportunities that last a week on average. Microcurrency Trader applies Darknet technology and moving averages to cryptocurrencies. Velocity Trader utilizes volume spike and Velocity indicators on custom stock lists. Quantum Scripts scans the markets for momentum acceleration signals and employs Quantum noise filters. Optimal Trader finds directional pre-earnings opportunities that are optimized for entry date, stock movement, and volatility surge. My Trades tracks the profit/loss of your trades, displays stock charts and risk graphs, creates new trades, and edits existing trades. Morning Report provides top 10 option rankings in 6 categories each day.
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