As a day trader, one of the most important aspects of your trading day is to identify ideal trade setups and quickly execute your trades to book a profit on extremely quick moves. This means that the traditional 20-day and 50-day moving average crossovers used by swing and position traders are not suitable for day trading strategies. Therefore, day traders are best served with moving averages that cover fewer periods, such as five or eight, that should be applied on charts covering shorter timeframes – preferably minutes.
Which moving averages work for day traders?
Most day traders use the one-minute, five-minute, 15-minute, and 30-minute charts to find potential trade setups when their objective is to close their positions within a few minutes, or a few hours if they want to hold their trades for longer.
Most moving averages work well regardless of the timeframe to which they have been applied. Whether they are incorporated into a one-minute chart or a one-hour chart, the results are typically the same
Therefore, the most crucial aspect of the moving averages used by day traders is the number of periods covered, with the main goal being to use MAs that cover anywhere from five to 15 periods. This makes it easier to identify trend changes very early.
The best combination of MAs for day trading stocks
Most experts recommend that day traders combine the five-period, eight-period, and 13-period simple moving averages (SMAs) to pinpoint the best day trading opportunities in the stock markets.
The fact that this combination of SMAs is used by many day traders has turned them into a self-fulfilling strategy; they are very effective because most traders execute their trades based on them.
The five, three and eight-period SMAs are connected to the trusted Fibonacci indicator. These three are designed to coincide with the major Fibonacci retracement levels, allowing them to benefit from the significant accuracy associated with the Fibonacci indicator.
Keep in mind that the Fibonacci numbers are derived from sequences that occur in nature, which is why the indicator is so powerful. After all, the price movements experienced in the financial markets are usually triggered by human nature (emotions).
Chart 1: 15-minute GOOGL chart with 5, 8, and 13 SMAs
How to apply the three SMAs to your stock trading activities
Using the chart below, you could have pinpointed several high-probability trade setups triggered when the five-period and eight-period SMAs cross over each other during a period of several days as it is a 15-minute chart.
Chart 2: 15-minute GOOGL chart with highlighted trade setups
Point 1: This is a perfect location for a short trade that you could have held into the next trading day.
Point 2: This was a false buy signal that could have led you to close your short trade from the previous day. Another short signal was generated a few hours later, which could have got you back into the short trade.
Point 3: A bullish trade signal was generated at this point, which could have seen you close the short trade that you had held for the past three trading sessions and enter into a long trade.
Point 4: A bearish trade signal was generated, at which point you would have closed your long trade and stayed out of the markets.
Point 5: A bullish trade signal was generated at this stage, which may have resulted in a long trade that could have been closed at Point 6.
Point 6: This shows a region where the three SMAs were squeezed together, which usually indicates that price momentum is slowing down and that the trend is likely to reverse. This provides an ideal trade exit or entry position once the faster SMAs cross over each other.
The 13-period SMA is mainly used to identify the price trend. The price is said to be in an uptrend whenever it is above this SMA line, and it is considered to be in a downtrend if it is above the SMA.
A word of caution
Keep in mind that there are no perfect indicators. The SMA crossovers could generate false signals and may not work well in range-bound (sideways trending) markets.