Predicting likely support and resistance levels is what technical analysis is all about. Previously, we discussed how moving averages can be employed to do this. Let's take a closer look!
| |||
|
The "major" moving averages that we recommend monitoring are the 13, 22, 50, and 200 DMAs. Generally speaking, the longer the time frame of the moving average, the more significance it has. This is especially true of the 50 and 200 DMAs, which are closely watched by most chart-reading market participants.
The 13 and 22 DMAs are more open to "customization," depending on a trader's timeframe. These two moving averages are particularly useful for swing trading; you'll see them constantly referred to in RightLine set-ups. They've proven time and time again to have a correlation with price reversals.
It's not uncommon for traders with a shorter timeframe to employ a shorter period, such as the 10 DMA or even 5 DMA. While the exact number might seem arbitrary, a savvy trader won't settle on a DMA until they've back-tested it. If a stock or index has displayed a reliable correlation with a moving average in the past, it may be worth watching.
Channel trading is a great way to use moving averages to your advantage. Often times you'll run across a stock that's bouncing between two MAs - for instance, the 22 and the 50. With one acting as support and the other as resistance, a handy road map is provided for entry and exit points. By combining this strategy with trailing stops, you can even position yourself to profit if one of those levels is broken.
One point of confusion for some traders is whether to use simple moving averages (SMAs) or exponential moving averages (EMAs). The latter tend to be more reliable, since they give more weight to recent price action. Daytraders, however, often find that SMAs are more useful for short-term signals.
One of the most reliable reversal points is created when a moving average coincides with a trendline or horizontal support/resistance level. The value of moving averages can also be increased by combining them with other indicators. A stochastic buy signal, for example, might occur just after a moving average bounce. This would be a good indication of near-term upside.
The best way to learn about moving averages is to watch how stocks behave. Each equity or index has a different relationship with its MAs. The more reliable that relationship is, the easier it is to gauge set-ups and profit targets.
