|In all the years I have been a technical analyst, studying the theories of Ralph Elliott and W.D.Gann, I keep coming back to the KISS principle as the best form of analysis. To this end I would like to reintroduce technicians to moving averages, but this time used with a difference not usually published. I call the first strategy the JM strategy and it has proved successful for conservative investors.|
|Every technician knows that a moving average band traces the highs and lows of a stock. How many technicians however, have applied that band within a trading range? Looking at the chart below, you will see what I mean.|
|Figure 1: QQQ with moving average bands.|
|Graphic provided by: AdvancedGET.|
|The chart is of the QQQs. I have drawn three moving averages. The light blue line is a moving average band set to 15-days and offset, in this case by 3% upwards and -3% downwards. These are the long/short parameters. With this setup, when the price breaks above the upper band, I will go long, and when it breaks below the lower band, I will go short (indicated by sell on the chart). The RSI indicator acts as a decision helper, so should the indicator trend be moving downwards, I feel a great deal more comfortable in my decision.|
|To close my position, I will use an optimized moving average, which is usually short-term. It is the red line on the chart. A break below or above this moving average will close a position.|
|As you can see, at the moment I will be short the QQQs either by selling them short in the market, or by buying a PUT option. I will hold my short position until the QQQ breaks above the red moving average or breaks above a following stop-loss, whichever is sooner. |
Admittedly I am always late in entering the market, but at least I am always in the right direction. The strategy allows profits to run and kills losses quickly. Do experiment with the closing moving average to suit your personality. I have often ignored it, using the upper band or a stop-loss as my closing strategy.
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