Per Investopedia, the moving average (MA) is a simple technical analysis tool that smooths out price data by creating a constantly updated average price. The average is taken over a specific period of time, like 10 days, 20 minutes, 30 weeks or any time period the trader chooses.
The 20-Day Simple Moving Average is the average price of the past 20 days. In this swing trading strategy, we consider price to be bullish when it is above the 20-Day SMA bearish when it is below the 20-Day SMA.
Per Investopedia, The relative strength index (RSI) is a momentum indicator used in technical analysis that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset.
RSI > 70 signals an overbought condition, and RSI <30 signals an underbought condition.
Per Investopedia, Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. The MACD is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA.
Looking at the MACD on the chart, crossovers occur when momentum has changed from bearish to bullish or vice-versa.
None of these 3 indicators are full-proof. Used by themselves, many would even consider them useless. However when used in conjunction they can be extremely helpful in predicting future price movement.
Therefore, in order to enter a trade we are looking for:
Before taking a trade, you should map it out. Where you will take profits and where you will take a loss if the trade moves south.
Price Targets: Price Targets are set at previous highs or previous resistance, as well as 70 RSI. Decide how much you will sell at each sell target. I typically opt for 1/5. You could also choose 1/3 or 1/4.
Stop Losses: Stop Losses are placed at support levels. If price drops below these levels you take a loss. You can sell your full position, 1/2, or any other amount. Others choose not to sell any and will wait for price to move sideways again and average down.
See how I prepared for a $GRPN Swing Trade in the image below.
Remember, price has memory…
1.3 Risk Management
3.2 CTM Thinkorswim Custom Scripts
3.3 CTM Trend Bias Cheat Sheet
3.4 CTM Trading Plan Worksheet
3.5 CTM Risk Management Worksheet
3.6 CTM Options Trading Cheat Sheet
3.8 CTM Stocks to Trade Checklist
3.9 CTM Opening Range Breakout
3.10 CTM Personal Trading Rules
3.12 CTM Thinkorswim Custom Orders
3.13 CTM Identifying Key Levels
3.14 CTM EMA Clouds
3.15 Trading with a 9-5
Day Trading Playbook
Three White Soldiers
Three Black Crows