Undestanding Moving Averages

[tmaschino]

First, thank you Justin for the forum and the wonderful Moat/MOS tools.

Take a look at the chart for CHS (Chicos)... There's been three occasions in the last 5 months that MACD, Stochastics, and the 10 Day MA were green. The stock performed a dead cat bounce and continued downward.

During this time MACD, Stochastics, and the 30 day MA have never been green at the same time. I've almost pulled the trigger on CHS but have remained disciplined (something I rarely did when I was investing willy nilly). Sometimes it's the investment that you don't make that makes all the difference.

[baggio071]

Apparently, there is a way to do 30 day moving average on MSN. As reported as some guy on Phil's blog Rule #1 Blog: Phil Town on Investing: CHICO'S: CASE STUDY RE: THE IMPORTANCE OF VIRTUAL TRADING

near the end, he says that:

I've found a way to show the 30 day MA on MSN. If you use the MA envelope and change the settings to a 30 day period and 0.00 width, you'll get the 30 day MA.

I am just a beginner, so if someone could confirm this is indeed true, it would help.

Otherwise, just use StockCharts.com - Simply the Web's Best Stock Charts - it is easy to add 10/30/40 moving average graphs

[physics]

So it seems from this thread that Phil advocates a SMA instead of an EMA? I've noticed that they are fairly similar, but why a SMA instead of an EMA?

I think that it may be best to use a 40-day MA instead of anything lower because if you have a stock that is moving upward, you want to minimize the jumps in and out, after all, we are looking for good long-term stocks. I may use the suggestion to use a 10-day MA to purchase the stock, though. What time frame is recommended on the charts? Is there any need to look back more than a month or two to see these moving averages?

Also, I have been using Yahoo's interactive charts, you can enter any number you like for any of the technical indicators.

[Clete]

Originally Posted by patfergie44

Thanks for the replies. I do realize we need to use the MACD and the Stochastics for the other two signals and I realize that the 10 day moves faster than the 30 day. What I'd like to know is why not use a middle-of-the-road average like 20 days? It wouldn't bounce as much as the 10 day but would also signal a buy faster than the 30 day. Does anyone have thoughts on using a 20 day average?

I think you ask an excellent question. It's one I've asked in the past and gotten about the same results you have gotten here. My advice is to paper trade using the 20 day MA and see if you like the results better than those you get by using any of the other more standard charts. Try a 15 day MA as well. Just play around with it and seen what seems to work best for you.

On another site I was given what I think is terrific advice that I'll share with you here. You can use both the 10 and 30 day MAs in tandem, or perhaps more precisely, you can use the 30 day MA as a fourth tool. When all three of the tools (10 day MA, Slow Stochastic and MACD) are saying buy, only do so if the 30 day MA is going up. If it is going down or if the bell curve seems to be topping out then don't buy unless you are willing to risk a potential sideways or negative trade.

Using the 30 day MA in this way still won't guarantee that every trade will be a positive one though. Take COH as an example. If you bought in on the morning of the 16th of May as the three tools indicated, even though the 30 day MA was still on a modest upward trend, the stock lost money. If you had stayed in until all three tools gave the signal to get out, and you waited until evening to check the charts (like most of us who work for a living have to do) you'd have gotten out on the morning of the 22nd (just in time to watch it go back up slightly that day, by the way ) and you would have been hammered with about a 9% loss! Ouch!

BUT, even though the system isn't perfect, it does work! The idea here is to understand enough about what these charts are telling you so that you can tailor them in order to get the information you want when you want it. There is no magic to it and there is no such thing as a "best" way to do this stuff. You just have to do it and keep on doing it until you find what works best for you and your style of investing.

Clete