Hello, my friends and trading enthusiasts! I hope you are doing swell. Check out this quick 13-minute video for a really simple moving average strategy that is sure to blow your minds and beef up that portfolio! This is one you can easily absorb from start to finish on your lunch break.
Check Out the Transcript Below…
Hey traders, investors, stock market enthusiasts from around the world. Hope you’re doing absolutely fantastic. My name is Jerremy Alexander Newsome and this is your Investing Shortcut for the day.
I want to share with you a really fun and interesting moving average technique that I use. And when I say technique, it’s just a pretty simple strategy, if you will, using two very common moving averages.
And I’ll kind of explain how you come up with those averages and how you can use them. So the averages are the 100 and the 200 simple moving averages. When I say simple, what it does is it takes the last 100 trading periods, adds them all together and divides by a number. It can be any number.
In this case 100 and 200, these are moving averages often used by hedge funds, mutual funds, and proprietary trading, other big trading accounts for entries, exits, targets, determining and understanding trends, things like that, because they are used a little bit more of a longer term perspective, but you can use them on any time frame.
And since they are used often by mutual funds, hedge funds, individual traders, retail traders, proprietary traders, as well as things like where it’s kind of self-fulfilling prophecy. Some people use them so often they work and they work pretty well. And you can kind of frame your trades based on these moving averages, depending on what it is that you’re looking for, and what time frame it is that you are trading.
So really, for the long, long-term traders, you can go out to as far as a monthly chart. I very, very rarely use a monthly chart for long-term moving averages, unless the stock has been around for a long time, like, let’s say Chipotle, for example. I’m gonna hide all of my drawings here. And obviously, we all know that Chipotle’s been around for a bit, since about 2006.
So you’ll notice that this blue line is the 100 simple moving average on a weekly chart. So since you have that moving average there, it takes you approximately, seven to eight seconds, once you pull up a chart to locate where the moving average is and what am I going to be doing with those averages? Am I buying the stock off of that location? Am I gonna short the stock off of that location? Am I doing options or another options strategy, am I buying or selling? Something like that.
Here’s a weekly chart, for example, on Chipotle. Again, these are the weekly long-term moving averages. So if you’re using the weekly or the monthly charts, you’re probably looking at being in these trades for years, more than likely, very, very long time potentially. So way back here on Chipotle, very interesting, in fact, when both moving averages were created, the 100 and the 200 back in 2009, on the weekly, just because the market at that point has only been around, the stock has only been around 200 weeks it came down to both the 100 and the 200 simple on a weekly and then bounced very nicely. Here in 2008, once the 100 simple moving average on a weekly was broken, so I could have a big bear sell off. Same thing over here, right, once the 100 simple moving average was broken, had a big sell off.
So way back here on Chipotle, very interesting, in fact, when both moving averages were created, the 100 and the 200 back in 2009, on the weekly, just because the market at that point has only been around, the stock has only been around 200 weeks it came down to both the 100 and the 200 simple on a weekly and then bounced very nicely. Here in 2008, once the 100 simple moving average on a weekly was broken, so I could have a big bear sell off. Same thing over here, right, once the 100 simple moving average was broken, had a big sell off.
And you’ll notice right here, we never actually quite got down to the 200 simple moving average on a weekly chart on Chipotle there. But, you had a great bounce here, and about 600, you had another really, really good bounce there at that price as well. So keep in mind, any strategy that I’ll be showing you over the next few weeks, months, years, if you guys working and logging on and reading and watching Investing Shortcuts, keep in mind every strategy works just not all the time. Doesn’t matter what I show you.
If I show you, hey guys, this is my absolute textbook favorite trade setup in the world, that one’s only gonna work about 50% of the time, sometimes a little bit more, depends on what the strategy is, right? If it’s selling options, yes, you’ll have a very high win percentage, the strategy will work pretty often. But it’s the time that it doesn’t work that you really need to know defense and how to structure that move and how to structure that play.
For example, here’s Chipotle on the daily chart. Now these are the daily long-term moving averages and we’re looking at the daily. Now you’ll see you get a lot more trade setups and a lot more trade opportunities to base your analysis on. So, example number one would be, if you’re below the 100 simple moving average, which, of course, you can see is this blue line, once you’re below that on any time frame, you can use it as a resistance. And you’ll see that Chipotle, those three times right there, it traded right to the 100 simple moving average and then failed like I failed chemistry. Here is another time that it failed, a little bit, but not quite as much. You might have gotten stopped out right here for a loss. And then Chipotle trades to the 200 simple moving average, fails, and you could’ve taken that trade bear either with put options, maybe you short the stock, maybe the bear call spread, maybe you did a bear put spread which is a debit spread.
So, example number one would be, if you’re below the 100 simple moving average, which, of course, you can see is this blue line, once you’re below that on any time frame, you can use it as a resistance. And you’ll see that Chipotle, those three times right there, it traded right to the 100 simple moving average and then failed like I failed chemistry. Here is another time that it failed, a little bit, but not quite as much. You might have gotten stopped out right here for a loss. And then Chipotle trades to the 200 simple moving average, fails, and you could’ve taken that trade bear either with put options, maybe you short the stock, maybe the bear call spread, maybe you did a bear put spread which is a debit spread.
And then Chipotle trades to the 200 simple moving average, fails, and you could’ve taken that trade bear either with put options, maybe you short the stock, maybe the bear call spread, maybe you did a bear put spread which is a debit spread. A lot of different strategies you could do there, of course, on Chipotle or any stock.
And again, this works on just about any time frame. The lowest time frame that I suggest you use on this particular analysis, this particular strategy, is the five-minute time frame.
So I go here an hourly chart and show you how the hourly also works equally as well. So your hourly chart, here it is. And if I zoom out here just a little bit, I get each on of these candlesticks representing an hourly time frame. And again, if the stock is about the 100 simple like there, or right here, use it as a buying location.
Obviously, you can see you’ve lost money on this buying the bounce right there and on this buying the bounce right there. And you might’ve lost money shorting, that location, maybe made a little bit of money shorting right there, but potentially lost a little bit. But, as it comes out to the 200, you make money there, you make money there, lose money there, and you make a lot of money shorting right there off the 200 simple moving average. So again, make a little bit, make a little bit, lose small, lose small, lose small, break even, maybe make a little bit, win big, win really big. And that’s the point, right?
As long as you understand the risk value of your trades and you go ahead with any strategy and you comprehend how much you might be winning, making or losing, as long as you lose less money than you make, mathematically you can be profitable in trading. I think that’s a really big takeaway for a lot of traders.
Look, this is the hourly time frame. So this might be for traders who are by the computer a little bit more and they’re able to trade a little bit more often. Again, if not, you can use this on a daily time frame. Now this works with any stock. Here’s Apple, for example. And here’s the daily chart on Apple. Apple, the stock uses moving averages very, very well. Here are your long-term moving averages. And just with the last, I’m gonna hide all my drawings here, just the last few years, you can see how many times the stock has beautifully interacted with this moving averages and done something majestic.
So, for example, back here at 2014, beautiful bounce off the 200, very good bullish opportunity, very good bounce off the 100 there, 100 there, 100 there, and right here you lost a little bit on the bounce off the 100, but you make money here off the bounce off the 200. Then over here you make money playing the bearish move off the 200.
You lose a little money here off the 100, make money off the 200, make a little money on the 100, lose, lose, potentially make some money depending on how you played it, potentially lose money depending on how you played it, potentially made some money depending on how you played it, made money, made money, maybe made a little bit, maybe made a little bit, definitely made a lot right there, and again we’re bouncing right here off these levels.
So again, the trade works 50/50, but it’s very easy to spot, it’s very easy to recognize. It’s like, okay. Are we above the moving averages? Then let’s use them as a support. Are we below the moving averages? Then let’s use them as a resistance. From there it’s kind of up to you to determine what kind of strategy do you want to implement. Is it going to be options? Is it going to be shares? How long are you gonna be in that trade, right? The longer the time frame you’re using, the longer you should be in that trade.
So for example, on Apple, here’s your monthly chart, and you’ll notice it’s been awhile since we hit any of the long-term moving averages on a monthly time frame. It’s been a long, long while, in fact. And here’s the weekly. And you’ll notice these are the ones we’re just looking at kind of a little bit ago. Here’s a beautiful bounce off the 200 simple moving weekly. I mean that trade right there from 2014, 2013 on Apple all the way to here was over 100% gain after including a split. That’s magnificent. There’s another few opportunities recently here on Apple, and this is a beautiful short back in April 2016 using the 100 simple on a weekly.
So again, you’re not gonna win on every trade, depends on the strategy you’re using. You can implement a lot of different strategies. But the goal is in trading, find something really easy, simple, because trading is simple yet difficult, kind of like surfing, right. If you’re surfing, it’s actually kind of simple, stand up on the board. (chuckles) So, in reality, that’s the whole task, that’s it, you’re done. Stand up on the board. But there’s a little bit more that goes into that, right? The waves, size of the waves, what kind of board are you using, what length, what width, how far out are you, the tide, are there any sharks, are you wearing a body suit, what kind of wax are you using? There’s a lot of different things that go into surfing.
So in trading, you can get as advanced as you want, but keep it, find a very simple, easy to replicate strategy, know how to mitigate your risk, create a trading plan based on that and then repeat that process over and over and over. I do this strategy a lot with the hourly time frame and the daily time frame. Hourly charts work really well with these particular trades and setups. And again what I use the weekly time frames for, like this little setup right there off the 200 is using weekly option trades, trades that expire within that week or within two weeks. Obviously a much more aggressive type of trading. In fact, probably the most aggressive type of trading you can do in the markets. But with great risk comes great reward.
And again, as long as you know how to mathematically calculate your risk so that you keep it the same every single time, a trader with a 50/50 win/loss ratio can make money. I’ll give you an example. Let’s say you risk a thousand, a thousand, a thousand, and a thousand on these trades, and ironically enough you risk a thousand on this trade and then you lose a thousand on this one. So you lose a thousand bucks on that trade, you lose a thousand bucks on this trade, and the next trade actually works for you, and you make a thousand bucks, 1,000. And this trade over here, you risk a thousand and you actually make 2,000, which is a one to two risk-reward ratio.
So being a 50/50 trader, you’re up in this scenario a thousand bucks. Now in this exact same scenario, let’s say that you risk a thousand, risk a thousand, risk a thousand, and then risk five. You can probably already see what I’m gonna do here on this one. I’m gonna say that you win on all three. Boom! Boom, boom! Three winners in a row. You’re up three grand, feeling good. One loser, you lose five grand, now you’re in the hole 2,000 bucks. All because you changed your risk randomly, right? You’re actually a better trader than I am, but I’m making more money than you are. Ladies and gentlemen, risk is the key to trading profitably regardless of what strategy you are using.
Feel free to hop over to Investing Shortcuts. Once you go to investingshortcuts.com and click on trading. There’s a trading tab up here and then go ahead and type in the search function, you can type in my name Jerremy Newsome, spelled two r’s, yes two r’s, J-E-R-R-E-M-Y. And oops, I’m gonna try that one more time, sorry. Jerremy Newsome, and if you click search, I believe some stuff will come up.
There we go. So there’s one of the most recent videos that I have. You’re gonna have some other videos. How to Trade the Tweezer Top by myself. And if you click on me, you’ll be able to get other profiles and videos that I have created like How to Trade the Tweezer Top and other really good analysis, Winning Stock Formula, Biggest Day Trading Myths, a look at Apple earnings, and much more. You can go through those and really check out some other videos and articles I wrote up on risk management. But anyway, I hope you like this video.
You guys absolutely rock. Thank you for watching and thank you so much for being a real live trader. You rock, and until next time, love life, live life and trade it, bye.