Learn How to Construct and Trade a Dynamic, High Probability, Moving Average System for Stocks, Futures, and Forex Traders

11/17/2007 12:00 am EST

Focus: COMMODITIES

John Person

Founder and President, John Person, Inc.

John Person' s workshop was the place to be for traders looking for a comprehensive lesson on utilizing a sophisticated moving average (MA) system to improve their trading results.

John began by explaining that a moving average is a math calculation that averages out a series of numeric values and that can be calculated for any time series. Moving averages are often applied to stocks to predict future prices, percentage returns, yields, and trading volumes. He advised attendees that a MA channel will help keep you focused and can help you uncover changes in momentum.

John explained that moving averages take several forms, including simple, weighted, and exponential moving averages, and he added that he doesn't generally use the exponential MA (except for longer time periods), since he believes that there is not a huge difference between weighted and exponential MA's.

He also stated that the simple MA was best used for short-time periods, usually less than ten. Weighted and exponential MA's are more sensitive and complicated and give greater weight to recent periods.

John pointed out the pros and cons of moving averages.

The Pros: An MA defines average price changes over time and smoothes out trading noises. It is an excellent trend-trading tool and is used to identify triggers, entries, and support/resistance. And it can be used in trading systems and back-tested.

The Cons: An MA lags behind market price changes. It's not effective in choppy markets, is not a futuristic price-projecting tool, and is not effective in discovering price extensions. Also, it can't predict running points like Fibonacci or Pivot Point analysis, especially in choppy markets.

John then gave traders specific tips for using a moving average system. He noted that there are a variety of input choices, including highs, lows, close, opens, average of range highs and lows, average of typical high, lows and close, volume, and volatility.

He said that an MA can help you identify up, down, and sideways trends, using price as related to the moving average by identifying crossover points of interest. His simple rule of thumb: if the MA is rising and prices are above it, the trend is considered up and if MA is declining and prices are below it, the trend is considered down.

Next, John discussed several categories of crossovers and filters, including time dimensions, CCI, Stochastics, and MACD, noting that indicators used for confirmation should not be directly related to one another.

He offered the following trading tips:

  • In trading, sometimes the best signal is to buy high and sell higher
  • If you get a buy signal, you should see a follow-through
  • Look at sectors and see how the stocks in them are performing
  • Analyze markets from a technical approach and see if the technicals support the fundamentals.
  • Don't sell support. Look for buy signals in a bullish mode. Wait for next buy signal.
  • Watch Price/MA, as well as past price actions at the open, high, low, and close
  • In addition to identifying triggers, traders also need to include trade management techniques to determine entry, risk, and scale outs or flat out exit levels.

John also demonstrated the advantages of employing multiple moving averages to help identify short-term and long-term trends, changes within time frames, support/resistance, and overbought and oversold conditions.

He then discussed using Fibonacci as MA settings, commenting that futures traders use shorter time periods, while equity traders generally use longer term periods. The shorter time periods are more sensitive to price changes.

John noted that pivot points can also act as support or resistance and as a MA component to determine price action.

He closed his presentation by recommending that traders have a set of rules that you can program to build and construct a trading system, and that it is imperative that you know what a tool is used and designed for and how it triggers a signal.

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