A Market Wizard on Short Term Moving Averages

A big thing that trips up new traders is they get an entry signal at a breakout or a bounce off a key moving average like the 50 day simple moving average but have trouble quantifying how to let the it run if it is a winner or cut the loser short if it goes down.

I came across this quote from Market Wizard Marty Schwartz from his book: Pit Bull.

“The 10 day exponential moving average (EMA) is my favourite indicator to determine the major trend. I call this “red light, green light” because it is imperative in trading to remain on the correct side of a moving average to give yourself the best probability of success. When you are trading above the 10 day, you have the green light, the market is in positive mode and you should be thinking buy. Conversely, trading below the average is a red light. The market is in a negative mode and you should be thinking sell.” – Marty Schwartz

I agree completely with his observation andI have found the same thing in my chart studies.  Also in  sharply up trending stocks the 5 day EMA is respected and acts as support. See the charts of $CMG, $CALL, and $AAPL for recent examples. At times the 5 day ema also acts as resistance as it currently is as $GOOG is having trouble breaking through and holding above the 5 day EMA. The key is to find an up trending stock that respects the 5 day or 10 day ema and then the moving average itself can be used for entry and exit signals for short term trend identification.

This is a simple system that can get new traders trading on the right side of the market with advice from the pen of a real millionaire market wizard.