The Only Moving Average Guide You'll Ever Need

most Traders use moving averages too simplistically to gain a trading Edge. In this video, one of our most seasoned prop Traders provides you with the only moving average guide you'll ever need. I'm Mike Bella Fury, and we're a longstanding proprietary trading firm located in New York City since 2005, and now Miami as well, and proud to develop numerous consistently profitable Traders. Watch, take notes, and learn from our prop firm so you can grow your trading account.

How many of us have been in this situation where we're just starting out trading, looking for guidance, and we learned that we're supposed to buy when the fast moving average crosses above the slow moving average? And then we quickly learn that if we follow this process, we will lose money, and that the strategy is very environment specific. If we are in a Range, it does not work, and so we conclude that moving averages don't work. And this is why some people will tell you that moving averages are useless or that moving averages lag. But this is not how indicators work, and I'll get to this in a minute. Moving averages are in fact a great tool for me. This is simple: if you're a scalper, you may want to scalp in the direction of the trend; if you're a momentum Trader, you may want to find the strongest or weakest stocks; if you're a swing Trader, you may want to find the best stocks to trade and always trade with the trend.

When I trade momentum or TR Trends, either intraday or swing, I always want to follow the path of least resistance and find relatively strong or weak stocks. This means I want to be able to identify Trends, and I want to be able to identify chop or ranges, also known as the absence of a trend. It's equally important to identify both of these environments, and I want to be able to identify the right stocks to trade, and I want to be able to do this quickly. To do this, I want to know the trend on multiple time frames, where I can see clearly an array of important Market Cycles. Because let's face it: some playbooks will not work in ranging, trendless environments. Some setups are much better suited for a trending environment, and in the strongest and weakest stocks. So context is everything.

I use moving averages to: one, identify Trends; two, trade with the path of least resistance; three, assess the overall Market context; and four, measure relative strength to trade the right stocks. And I'll show you how to do all of these things. Moving averages are one of the simplest indicators to use, and you can get them on any platform. If you're a new Trader wondering why this is such a popular indicator, this video will help you understand why and how to use them properly, and how to use multiple time frames to your advantage.

So we're starting a new trading year. As we tighten our process, we might want to revisit our chart layouts to ensure that we're setting ourselves up for success in the New Year. Personally, I want to see a consistent and efficient visual representation of the market with no fluff. I want to change my chart layouts as little as possible as we progress through the year. And as I always say, indicators should add bandwidth to our trading, not take it away. Quantifying information should simplify our lives. So my goal is to process information quickly so I can focus on the market and my playbook.

So in this video, I'll show you how I think of moving averages, which types of moving averages you can use, how I choose the look back periods (which might be a dramatically different approach than what you're used to), and how I use multiple time frames. In the end, I'll share a personal technique that I use, and I've never really seen anyone do this, to Define Trends either in an algorithm or for systematic trading. So there's more than one way to skin a cat, so my objective here is to provide tools and ideas you can draw from and make your own.

So let's first go over how moving averages work, because if you don't understand how indicators measure a Market Dynamic within your strategy, you'll be blindly using an indicator without understanding the core concept, which is not good. So let's take a few seconds and break it down. A moving average is simply the average closing price over a moving window of bars. This moving window is called the look back period. So we're seeing an average price over a certain number of bars. As we print more bars, this window of bars used in the calculation moves forward. It's as simple as that. In statistics, the average represents a central tendency or the typical value of a data set. So in our case, the moving average is giving us the typical closing price within the look back period on whatever time frame we choose. The current value of the moving average (circled in yellow here) represents the central tendency of closing prices within this look back window. So it would make sense, as we move forward in time, that if this typical closing price is rising, then closing prices are in an uptrend; and if this typical closing price is falling, then closing prices are in a downtrend; and if it's flat, then closing prices are moving sideways or ranging.

So on this daily chart of Tesla, if we choose a look back period of 21, it'll calculate the average close over the last 21 bars, which happens to be about a month of data. And if we switch to a look back period of five, it will calculate over the last five bars, which happens to be about a week. And if we shrink the look back period even more to two bars, it will calculate over the last two days. And so we can see that as we shorten the look back period, the moving average will follow closing prices more closely and respond more sensitively to price changes.

So what specific Market Dynamic do moving averages measure? They measure trend, of course. This is not the only way to measure Trend, but it is one statistically sound method. It allows us to measure Trends on multiple time frames using different time frame charts or by using different look back periods on the same chart. In a minute, I'll explain how I set up my charts and leverage this aspect of moving averages. But first, let's go over the different types of moving averages.

A simple moving average, as the name suggests, is the simplest type of moving average. A simple moving average calculates the actual mean of closing prices, which is the sum of the closing prices divided by the look back period. This is the most intuitive moving average, and for this reason, I think it's a great way to go. A few other commonly used moving average types use smoothing techniques in the formula. So, for example, an exponential moving average uses a smoothing formula that places greater weight on more recent prices. So naturally, an exponential moving average (shown here in blue) will respond quicker to price changes than a simple moving average. Some Traders, some quants, find this to be an advantage. I'm a big fan of the exponential moving average because it is smoother and more reactive than a simple moving average. But both are great.

Now, a Wilders moving average (shown here in purple) uses a smoothing formula that responds more slowly to price changes. J. Welles Wilder invented ATR, so the Wilder's moving average is often used in the ATR formula to calculate the average true range. This is the default moving average for ATR on most platforms. Now, there are other types of moving averages, such as weighted moving averages and a hull moving average, but for our purposes, starting with the big three – the simple, the exponential, and the Wilders – is more than enough. And there really is no wrong answer. Play around with it, pick one, and stick with it. The key, I think, is to stay consistent with your approach to the market. In a minute, I'll show you which one I prefer and how I like to use it.

So how many times have you heard people complain that moving averages lag, right? It's the sort of thing people are taught to say, but it's not based on an understanding of Statistics or how indicators work. Do moving averages lag? Of course they do. They're intended to lag. All averages lag the most recent data point. This is not a flaw; this is a feature. And for that matter, all Market generated information lags to some degree, as it is undoubtedly based on historical information. Even price action, even tape, even economic data. If we can quantify it, we're looking at the past. Therefore, this concept of leading and lagging is a misnomer. It's a moot point. It's a marketing term, not a trading term. So indicators can be early or late relative to the move you're looking for. And of course, nothing is perfect. And if you can find something that quantifies the future, let me know.

So here's how we use indicators. I tweeted this out a few weeks ago: indicators are not strategies. And this is important. They're tools that help us measure a specific Market Dynamic or variable within our strategy. So in our case, moving averages help us measure Trends over multiple time frames. I like to use Trends as a contextual framework for my trades. I'm not buying or selling moving average crosses. I'm not using moving averages for entries. I'm simply setting up my charts to see the trends of various Market Cycles. So this is context, and context is important, right? Other factors such as fundamental Catalyst, volume, Market sentiment, themes, and Technical levels will also inform the context of my trade, but the trend is a major part of this context. So today we'll focus on measuring the trend over multiple time frames and set ourselves up to process this information instantly.

So how does a moving average exactly inform the trend? So if our moving average is rising and our stock is closing above our moving average, then our stock is in an uptrend on that time frame. Now here's the key: the time frame of our trend is defined by the look back window on the chart we're using. So I like to set up my chart so that these look back windows measure a relevant and easily interpretable Market cycle. So what do I mean by market cycle? I mean a time period that has significance, such as a year, a quarter, a month, a week, or a day. This allows me to put the trend into context and stay locked into these Cycles as price action develops, so that I'm answering the question: what is the trend over the last quarter or month or week or day, and so on? And I'll show you how to do this.

So let's start with a daily chart, because the daily time frame is powerful and easily interpretable. Why is this? Each bar on a daily chart represents one day, so it's very easy to visualize the meaning of time when using a daily chart. A common moving average on the daily chart is the 21-day moving average. The 21-day is a momentum swing time frame. What I love about the 21-day moving average is that it represents one month of trading. 21 days is the average number of trading days in a month. This is easily interpretable: monthly options expire every month, key economic numbers come out every month, monthly candles close every month. A month is a significant psychological time cycle. The 21-day moving average is a great swing trading tool. Many strong momentum stocks track this moving average as they make large advances, then they consolidate and hold the 21-day moving average before making another leg. When this trend changes, the higher time frame momentum is temporarily out of the stock, and other time frames may become more dominant.

So let's keep the 21-day period moving average on our daily chart for now. And I like to use an exponential moving average, but you could also use a simple moving average here. It is up to you, but my recommendation, as I said, is to be consistent. There's no right or wrong answer; different people have different preferences.

Now let's add a five-day moving average to the chart, and this is shown in yellow. You can see that the shorter the look back period, the closer the moving average follows price. The 5-day is responding much faster to price changes than the 21-day. The shorter the look back period, more noise and less lag it will have. This is because these shorter term moving averages measure shorter term Trends in the stock. I love the 5-day moving average because it represents one week of trading, right? There are five trading days in a week. This is easily interpretable: weekly options expire every Friday, because of these expiration Fridays there's a flow to each week and how the market behaves, the week resets each weekend, weekly candles close every week. So a week is a significant psychological time cycle.

So we'll use an exponential moving average here because I want to stay consistent. Now this 5-day moving average trend is a crucial intermediate term indicator. It's very hard to fight this trend. It's very hard to buy stocks that are trending below the 5-day moving average, unless we're making a short-term overextension play, right? It's very hard to sell short stocks that are trending above the 5-day moving average, unless we're making a short-term overextension play. This is a great intermediate term guide for executing with the trend.

So after an earnings release, Nvidia rode the five day for weeks. This is a strong Trend, and if you're swing trading this stock and can identify which Market cycle it's trading on, you can ride this trend until it terminates. So if we zoom in on this trend, we can see how well price action respected the 5-day Trend, even within pockets of weakness. In a second, I'll show you how I zoom in on these specific Trends to see them on Lower time frames, like we see here.

So let's go back to the daily chart and add one more moving average. Let's add a one day moving average to our chart, shown in white. Now you can see immediately that this moving average on a daily chart does not provide any information. Calculating the average of one close is pointless, right? It just tracks the closes. But the concept remains: one day of trading is a significant time cycle for obvious reasons, right? The open, middle, and close of each day together form a highly relevant volume and volatility cycle. The pattern of each day is unique. Each day contains its own new set of news items and Market participants, right? So one day is easily interpretable. So if we zoom in on this one-day trend, we can gain more resolution and more information.

So during Nvidia's earnings run, this one-day trend is crucial context for day trading, right? So as we initiate an uptrend, transition into chop, and then resume the uptrend, these three environment shifts can inform me what kind of intraday playbooks to employ and which stocks to trade.

Now let's put this concept to work. I'll show you how to translate these key moving averages from the daily chart to lower time frames so that they can become more interpretable. Let me show you what I mean. The shorter term moving averages on the daily chart, such as the five and the one, are not very granular. In other words, the shorter the look back period, the less resolution it has for that time frame. For example, though the five-day moving average accurately calculates the average close over five days, it is still very hard to see the price action around that moving average on the daily chart because it's such a short moving average. We can see the Wicks and the lows of the candles that find support at the 5-day, but not everyone will be trading off of a daily chart.

So let's build out these same exact moving averages on Lower time frames. I think of this as a way to zoom in on the moving average, a way to see this same Trend but with more granular price action, so that we don't have to watch the daily chart if we don't want to. You can do this by changing the lookback period to match your Market Cycles in whichever lower time frame you are trading. So how do we set the look back period of these moving averages to capture these Cycles?

All right, so let's translate a one day moving average to a lower time frame chart. Let's take a five minute candle chart and apply the one day moving average. So here's how we do it. There are 78 five-minute bars in a day, all right? That's 390 – which is how many minutes are in a day – divided by five, right? Equals 78. And we can multiply that by one, of course, to get one day, right? That's 78 by 1, equals 78. So we set our moving average look back period to 78 to look back one day on a five-minute chart. Now we have a moving average on a five-minute chart representing the one day moving average with higher resolution than the daily chart. This is a time frame a trend that I'll be very aware of when day trading. If I choose to take a short here, it is counter Trend by definition, and I'm fully aware of this. I know it will have to be a quick trade, and I'm most likely taking it from a short-term extension because the context is that on a one-day time frame, the path of least resistance is higher. Down moves will find support, and most moves in the stock will be higher until the context changes.

And I'm going to follow this process for all of my time frames. So let's translate our 5-day moving average to a lower time frame chart. So here's a 15-minute chart and a moving average with a look back window of five days. So we do the same process. We're going to figure out how many 15-minute periods are in a day. So that's 390 divided by 15, comes out to 26. And we multiply that number by five because we want to look back five days. So 26 by 5 is 130. So we set our moving average look back period to 130, which means we will look back one week on the 15-minute chart. Now we have a moving average on a 15-minute chart representing the 5-day moving average with higher resolution. Tesla has just moved into an uptrend on the one-week time frame, right? We're zooming in on this 5-day moving average and watching the price action around it.

So of course we can do this with our 21-day moving average, right? This time on the hourly. Now here's a small but important point about the hourly chart: a 1-hour candle does not divide evenly into a day, okay? So if we use an hourly chart, some bars will carry over into the next day. This will be split between days, and we don't want this. We want our bars to divide evenly into a trading day. So to do this properly, we can use a 65-minute Candlestick chart, right? There are precisely six 65-minute bars in a day. So here we will use a 65-minute bar chart in place of the traditional hourly chart.

All right, back to the moving average. So we do the math and see that six bars a day multiplied by 21 days gives us 126 as our look back period. We set our moving average look back period to 126 to look back one month on a 65-minute candle chart. Now we have a moving average on a 65-minute chart representing the 21-day moving average with higher resolution. So as you remember, this is a great swing trading time frame. On the one month cycle, Tesla is in a Range, chop mode, right, with the 21-day moving average moving sideways. This is going to inform my trading.

Now we have three lower time frames, right? The five-minute, the 15-minute, and the 65-minute. Each tracks the trend of a significant Market cycle, right? One day, one week, and one month, respectively. So to me, this is context. This is how I measure trends. This is the framework for how I like to set up my chart. Each time frame focuses on defining its own Trend. These time frames are my one day, one week, and one month Trends, right? So I'm providing a framework for you to consider, right? A way to think about moving averages, Trends, Market Cycles. As I said, maybe you're just taking an aspect of this and making it your own. Maybe you want to dive deeper into this subject, so I've learned from some great resources. So since I want you to be able to read more about this topic, I'll give you a few references, as I often do in these videos.

So two books that outline incredibly well the concepts of Trend and Market Cycles are Stan Weinstein's "Secrets for Profiting in Bull and Bear Markets" and Brian Shannon's "Technical Analysis Using Multiple Time Frames." Both books discuss Market stage analysis and moving averages. Brian Shannon has been a massive proponent of the 5-day moving average for staying with the path of least resistance on an intermediate term time frame, as we've done here. You will often see him apply this 5-day simple moving average to lower time frames.

Now let's return to our daily chart. Since we're using multiple time frames, we can now remove our 21, 5, and one moving averages from this chart, right? We have them on our lower time frames now. What are a few of the most popular daily chart moving averages? Right, the 200-day and the 50-day moving averages, right? Almost everybody knows about these moving averages. Both are used to represent long-term trends. Most Traders for these specific moving averages use Simple moving averages. These time periods are not significant, right? Neither the 200-day cycle nor the 50-day cycle is special. However, these moving averages are widely used, creating a self-fulfilling prophecy, right? Because of this, I want to be aware of these Trends, okay? Great, let's put them on our chart.

But I want to offer you some Alternatives. What if we continued with our significant Market cycle approach? We can measure the trend over a quarter, right? A quarter is three months, or 63 days, so we can put a 63-day exponential moving average on this daily chart to represent the trend over a quarter. If we continue to follow our Market cycle concept, a 63-day moving average is an alternative to a 50-day simple moving average, as you can see here, and it will behave very similar to the 50-day.

Let's now look at a weekly chart, right, to track a major Market cycle. There's one more widely used moving average that I want to bring to your attention, and this is the 30-week simple moving average. If you read Stan's book, you will learn all about the 30-week moving average in the context of his Market stage analysis. This is a common higher time frame moving average that does a great job of identifying shifts in Major Market cycles. For example, it can help identify when the stock comes out of a long two-year base, as we've seen many times over the last quarter. And this is PLTR if you're wondering. If you read Stan's book, you will learn that stocks in stage two uptrends will then enter a distribution phase over several months or years, and then enter into stage four downtrends, and then an accumulation stage for a year or two, and then break out again back into a stage two uptrend. This 30-week moving average tracks this process well. And this is the ARK ETF if you're wondering. By the way, this process happens on all time frames.

So I want to offer you an alternative, a way to continue our process of Market Cycles on the weekly chart. What if we wanted to visualize a one-year cycle? We would do this on the weekly chart. So we can translate the one-year cycle to the weekly chart using a 52-period exponential moving average, because there are 52 weeks in a year. This will capture these primary Market Cycles very well.

So now we have a comprehensive view of trend on every significant Market cycle time period, right? The one year on a weekly chart: 52 periods. One quarter on a daily chart: 63 periods. One month on a 65-minute chart: 126 periods. One week on a 15-minute chart: 130 periods. One day on a five-minute chart: 78 periods. I'm giving you options. This is how I organize my time frames, making everything easily interpretable and relevant.

Now I'll show you a little trick I use to measure Trends in these time frames without defining multiple look back periods. As we are often taught to do with moving average crossovers, sometimes we are forced to quantify trends when designing a trading system or automated model. If we want to Define them, we need to quantify them, right? And this is one very simple way to do it. Recall that we have various moving average types to choose from; some are faster than others at responding to price changes. So instead of using two different moving average periods to define the trend – which would confuse and complicate things and force us to make more decisions than necessary – we'll keep things simple and use a single lookback period for each time frame, right? The same periods we've been using here. However, now we will use two different moving average types. Recall that the Wilder moving average uses a smoothing formula that makes it slower and less responsive than an exponential moving average. So we'll add a Wilder moving average to each of our time frames. Each time we add it, we'll use the same look back period we already use on that time frame. So on our weekly chart, we'll add a 52-period Wilders to accompany our 52-period exponential, right? The Wilders is shown as the dotted line here. And we do this for all our time frames.

Our Trend now is defined using a single look back period – each time frame expressing its own logical Market cycle, right? There's no magic to this; it's just a way to keep things simple. I've tested this; there's less whipsaw than using two different look back periods. So again, it's more straightforward to follow. This is why I like it, right? So I'm using this for context. I'm not trading the crosses, right? When the exponential is on top, or price is respecting the trend of the Wilders, we're in an uptrend on that time frame. If the moving averages are sideways and coming together, and the price is chopping above and below, we can identify the market as trendless, ranging, or consolidating, right? It's crucial that I identify the difference, because this kind of context informs me what playbooks I should be employing. In other words, how I want to be trading the market, right? In a trend, breakouts work, holding positions longer works, momentum usually works, right? But in a range, in a trendless environment, mean reversion is much better. Shorter time frames may be much better because that is where the trends may be, right? I'm holding less. I'm looking for reversals and areas where buying or selling dries up at resistance or support, right? There are mean reversion and exhaustion setups for trading Market turns, and we might be referencing much lower time frame Trends to execute these trades.

And of course, if you define a trend and trade with it, you will never catch the top or the bottom. This is why Traders complain that moving averages lag, but this is part of trend trading, right? An uptrend is never established at the lows, and a downtrend is never established at the highs. This is true even if we use price action to Define our Trend, right? Trends take time to develop and change. However, if we use Trends from higher time frames as context, we don't care if they lag, right? They're just context. I'm using the trend to help me employ my playbook and find setups in the strongest and weakest stocks, right? The stocks with a Tailwind on the higher time frames.

So let's put this stuff to work and look at some examples. So questions I'm always asking myself are: what is the trend of the overall market, and what is the trend of the stock that I'm trading, right? The market has been in a Range over the last month, right? We've seen some weakness. We've been in a choppy Market environment, right? These types of environments are usually either pauses, resting periods during a bull market that may resume to the upside, or there's signs of a weakening Market before a complete shift in Trend, right? AKA sellers take control and we enter a bare Market phase, right? We don't know yet how this will resolve, right? As the market shifts into this generally weak ranging environment, I want to focus on the trend context of my higher time frames, because these environments always have a lot of noise and fear, right? Market participants love to predict, but I would rather react and trade what I see. If I can correctly identify the market structure and the trend, as well as the market tone, the breadth, and the leadership – all of which we discuss in the bionic Trader meetings on Tuesdays – then I will have my own process for understanding which playbooks to trade and how to manage my trades, right? I don't have to worry about all the noise. I can also find individual stocks in their own uptrends and downtrends, right? I can search for relative strength and weakness.

When the entire Market is in a Range on the higher time frame: A) I want to keep my time frame shorter, with no exceptionally long swing trades until this hourly chart breaks the range and confirms the trend; and B) we just got bought from the bottom of the range as sellers dried up, so if I see long opportunities off that low, those are fair game for me because the one day trend is up, right? And C) I'm watching my higher time frames for areas of resistance, right? I'm simply using these moving averages to help me correctly employ my playbook, trade in the direction of the trend, and trade the right stocks, right? So when sellers dry up at support and I see the one-day trend turning up, and I'm going to want to find relatively strong stocks to express this long, right? We can use Trend identification to measure relative strength and find better stocks to trade.

So Tesla, for example, is much stronger on the daily chart than the QQQ, and much stronger on the hourly chart than the QQQ, right? And Tesla started to flip to an uptrend a day earlier on the 15-minute chart than the Q's, right? This is clear relative strength. It's easy to see when looking at multiple time frames. So after sellers dry up, when I look to play the market rally off the range's lows, I'll look to Tesla because Tesla should offer much cleaner momentum and better risk reward long opportunities versus the Q's, which even though they bounced, remain quite messy, at least for a few days, right? This relationship may change, and we will pick up on that by watching the shorter time frames, but this is what we're seeing now, right? And that's when I will drill down to my intraday charts and the tape to make a trade, right?

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