How to Use Moving Averages, RSI & Bollinger Bands. // Stock trading strategies, Options trading basics 101 welcome to looking at the markets with David Moadel
today we're going to be talking about a few different things
what moving averages should i use plus thoughts on RSI and bollinger bands as a
swing trader
I like to buy dips within an overall uptrend i use overbought oversold
indicators such as bollinger bands and RSI to help me decide if there is a dip
or temporary oversold condition
meanwhile i use the 50-day and 200-day moving averages to help me determine if
there is an overall uptrend i tend to use the simple moving average or sm a
rather than the exponential moving average or EMA the simple moving average
is just an average for example the 50-day SMA is the average price of the
last 50 trading days
on the other hand the exponential moving average is a weighted average that gives
more weight to recent trading days
for example the 50 day EMA will give recent prices more weight or importance
than prices from 40 or 50 days ago
as a result the EMA tends to react more quickly to price movements
traders who want a more reactive moving average with less leg might choose the
EMA
for this reason the EMA may appeal to day traders and other short-term traders
however some traders would say that the SMA gives more of a true average for the
overall time . the SMA also tends to be smoother and steadier and gives fewer
trade signals
thus the SMA may appeal to some swing traders as well as long term investors
so in the end the choice of SMA or EMA is really a matter of personal
preference
so here's an example of a 50 day simple moving average and that's the blue line
on the chart versus the exponential moving average which is the red line on
the chart and they're both 50-day as you can see simple moving average
exponential moving average and you can see on the chart
how the EMA is more reactive to price jumps
so for example the price jumps here and the simple moving average doesn't really
react much to it whereas the exponential moving average reacts to it much more
also over here see more reaction more of a reaction from the EMA and over here as
well
the price jumps the SMA doesn't react much if at all
while the EMA reacts
whether you choose to use the SMA or the EMA you'll want to select time periods
that fit your time frame and trading style
i recommend experimenting with different moving average time periods on your
charting site app or software
as a swing trader I use the 50-day and 200-day simple moving averages to
determine whether the overall trend is up down or sideways
this is how I check the overall health of the patient
so to speak I want to buy dips within an overall uptrend and the long-term moving
averages help me to make sure that the overall trend is up
in other words they helped me to make sure that the patient is healthy
meanwhile i use overbought oversold indicators such as bollinger bands and
RSI to look for bible dips within an overall uptrend
it's like if a patient catches a cold that's the dip but is still generally
healthy
that's the overall uptrend you can be fairly confident that the patient will
recover soon
thus i use long-term moving averages to make sure that the general trend is up
and i use over box oversold indicators to look for temporary dips
so i can buy the stock with confidence so the
xlu chart provides a perfect example both moving averages are trending upward
you can see the in blue the simple moving average and the read it I'm sorry
the blue is the 50 day simple moving average and the red line is the 200-day
moving average and they're both trending upward and the 50 day simple moving
average is above the 200-day moving average simple moving average
so the patient is healthy
meaning that the overall trend is up and it looks good
sometimes this patient caught a cold but recovered quickly so like it tipped over
here but came right back up
dipped here came right back up tip here came right back up
so if you had bought xlu stock
actually it's it's an ETF every time it touched the lower Bollinger Band you
would have profited within a few days
ok touched it over here and then you would have made a nice profit if you had
bought it here and then held on touched here you would have profited if you
bought it here and held on it touched it here went down but came right back up
would have made a nice profit there touched it yet
and then a touch
here and bounced right off of it and if you held on for a while would have made
a nice profit there for day traders as well as traders who hold for a few days
shorter term moving averages might be more appropriate to determine the trend
examples would include the five-day the eighth day and the 10-day exponential
moving average or simple moving average
it's not a bad idea to choose two moving averages for example I use the that as
you saw the the 50 and the 200 good because having too many moving averages
on your charts can lead to confusion so i recommend having only a couple or very
few moving averages to look at at any one time
so even the healthiest patients will catch a cold from time to time as a
traitor
you can take advantage of this through the use of moving averages and if you
need more help with this or any other aspect of trading or investing
please feel free feel free to contact me anytime you can reach me through my
email at David Modell @ gmail.com
I hope this was helpful and i'll talk to you real soon
ok