Tradefair Weekly Update / Editor / 21 November 2008 / Leave a comment

Buzzwords of the Week: Tip #14. Moving Average Spotting the trend. The begining of an uptrend should look as follows;

- The fastest moving average chart line moves above the second fastest, and both above the slowest.

- The begining of a downtrend can be seen as: the fastest moving average chartline moves below the second fastest, and both below the slowest.

Welcome to the Weekly Update from Tradefair Spreads. In this weeks update we are going to look at the technique of using 3 moving averages.

Technical tip of the week

Many triple moving average combinations can be used; one popular short term combination that has been in use for several decades is 4 (fastest) 9 and 18 (slowest) days.

These can be easily set up on the Tradefair Spreads Platform - on your chart click Settings then choose 4 9 and 18 as your moving averages. There are also three boxes underneath - tick all three to get exponential moving averages which stay closer to the price action.

How traders use triple moving average combinations

There are many different strategies which use these triple moving average combinations.

1. One such strategy includes going long when the averages are in an uptrend state, and short when they are in a downtrend configuration, and stands aside when they are in a sideways configuration. (This type of strategy tends to have more losers than winners, but the winners tend to be much bigger than the losers.)
2. Another way to use the triple moving average combinations is help get an overview of the market. Bets on individual shares are taken only if they are in line with the overall market direction and in line with the direction of other shares in the same sector.

So, the same chart might cause two different traders to take very different actions, depending on their trading strategies and objectives.

Next - A practice example

Here is an example of one individual share whose 4, 9 and 18 day moving averages have just transitioned into uptrend mode - Retailer Next a FTSE100 company.

Two different decisions for two different traders

A trader who only traded Next and took all the 4 9 18 triple moving average combination signals on this chart would have had a very successful short trade which ran from May to July, followed by a losing long trade in July, a roughly break even long trade in August, and a winning short trade in September. A signal to enter a new long trade would have just been given.

But another trader who used the 4 9 and 18 triple moving average combination to help get an overview of the market would not yet have taken any action on the Next signal, for two main reasons.

1. the configuration of the 4 9 and 18 day moving averages for most market indices eg the FTSE 100, is sideways - no longer in downtrend mode, but not yet in uptrend mode; this trader may prefer to wait for the index to move into uptrend mode
2. not many of the other shares in the same sector as Next (General Retailing) have yet moved into uptrend mode, again this trader may prefer to wait until the majority of the shares in this sector have moved into uptrend mode. The top 8 shares in this sector by capitalisation are Marks and Spencer, Kingfisher, Next, Home Retail Group, Carphone Warehouse, Brown (N) Group, W H Smith, DSG International. Looking at the configuration of the 4 9 and 18 day moving averages every one of these shares except Next was in sideways mode at the close of the week ending 31 October.

Other triple moving average combinations

There are many possible triple moving average combinations other than the popular 4 9 and 18 day. For longer term traders the combination of 20 50 and 200 days for stocks is often used. Other traders use different combinations for different market conditions. Others again combine the use of triple moving averages with other techniques, and dont take signals just on the moving averages.

Until next week, happy trading

The Tradefair Spreads Team