1 Moving Average or 2... Which Is Better? -- with David Moadel
hello and welcome to looking at the markets with David Modell one moving
average or two which is better well I'm gonna tell you my opinion and they're
both valid you could have one moving average or you could have two up there
and if you have two then you're probably looking for a moving average crossover
to take you into or out of a trade if you only have one moving average up
there then you're probably waiting for a candlestick to close above or below it
to take you in and out of the trades all right so which one is better they're
both valid but I'm gonna tell you which one I like better at least most of the
time and I'm gonna tell you why first let me just thank you ahead of time for
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that all right we are looking at the home depot three-minute candlestick
chart each candlestick represents three minutes of price action for home depot
stock and everything I'm saying applies to any time frame really you could use
moving averages on the daily candlestick chart or the one minute five-minute
whatever it is alright and it's not just stocks you could do this with crypto
currencies or commodities whatever you like so right now I've got two moving
averages up there just as an example and I've got in orange you've got the nine
period EMA exponential moving average I could have just as easily used the SMA
simple moving average but I chose the EMA because it is a short-term time
frame three minute candles so I chose the EMA
but you know you could choose the SMA just as easily and I've got the purple
line up here which is the 15 period EMA so you got the faster moving average the
nine in orange and then you got the slower one the 15 in purple and when you
have two moving averages up there generally you're probably going to watch
for a cross crossover you know either the faster moving average crosses above
the slower one as a buy signal or perhaps you're waiting for the fat the
faster one like the orange one here to cross below the slower one the purple
one here to either sell your shares or to enter possibly a short position so
let's take a look first what I'll do is I'll show you what it looks like if I
just had one up there okay so I'm going to take the fifteen and I'm gonna change
it into a nine just for now so they're overlapping so there's only one moving
average up there alright so what people tend to do if they only have one moving
average up there is they might use a candle crossing above the line as a buy
signal and they might use a candle closing below the line as a signal to
sell their shares or possibly to even take a short position all right
and that's fine I'm not gonna say that's not valid it is valid it's a strategy
many people use it I'm never going to tell them that they're all wrong but
what you end up getting here and this is why I usually don't prefer just having
one line up there and using that method is because the candle sticks oftentimes
will hug the line I call it hugging the line when it clings to it and so as you
can see here you know the candle is above the line and then it's below and
then immediately after that above again and then immediately after that below
again and then soon it's it's above as you can see in the wick the wick on this
candle it went above and then whoa and then above and below it's just
a lot of unnecessary trading I think you're gonna run up a lot of commission
costs or even if you're using a free Commission free broker you're still
wasting a lot of time and effort and energy just buying selling buying
selling over and over and over because it's hugging the line and that can be a
problem and that happens a lot all right sometimes you get clean breaks like over
here but that doesn't happen all the time and this could be very frustrating
just buying and selling over and over consecutively all right one after the
other and if you're not using a no cost broker then those Commission's can
really add up pretty quickly and they can eat away eat away at your profits
which you don't want so that's why I tend not to use this method that much I
may use it sometimes but generally speaking I might prefer to use two
moving averages and so let's change the nine back to one of the nines I should
say one of the two 9s mas back to a fifteen just as an example and nine and
fifteen that's that's one way to do it okay
but I want you to test out different numbers on your own with virtual or demo
trading before you commit any real capital to any strategy I want you to
test it out for free okay with no possibility of capital loss make sure it
works first all right so as you can see if you use the classical old method
old-fashioned method of when the faster moving average crosses above the slower
one okay like the orange going above the purple one here okay you're in and it
goes up great and then you don't sell or go short until the faster moving average
average crosses below the slower one and so as you can see you would have been in
here or before here okay and then you stay in for a while and then you don't
get out until it crossed below it here and then you don't get back in until it
clearly crossed above it here okay and and you don't want to you know take
a position until you're clear until you definitely know you want to and so if
the two lines are on top of each other pretty much like here you don't make a
move or at least I don't I mean you can if you want to you make your own
decisions of course but I have a tendency to wait until there's at least
a little bit of white space a little bit of space between the two lines so I can
see that one clearly one line clearly broke above or below the other instead
of just them being on top of each other all right so I'm waiting for that clear
break and on this whole chart you know there's only a clear break once here and
then one other time here and that's it so you know and this is a three minute
candlestick chart so you're not trading every three minutes which is good you're
trading maybe every I don't know half hour or something like that maybe even
every hour or 45 minutes whatever it's it's a much better way to go in my
opinion you're not staring at the screen all the time buy sell buy sell alright
this is much calmer much more clear-headed in terms of clear thinking
and just you know you're you're not frantically trading which I don't I
don't like to have any emotion and certainly not not be a frantic trader
okay I like to be calm and only trade really clear setups and be patient and
wait for it and don't feel like you have to trade constantly alright so I am
generally usually not always but usually going to choose a duel or two moving
average system over just one and that's why I hope I explained it clearly to you
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