Trading stocks can be a profitable occupation provided you have mastered it first. The convenience of trading stocks or other markets, for that matter, has never been greater. These days it takes literally a click or two to place a trade from the comfort of your home office. Or even from your cell phone. It takes another click or two to close your position. The growing number of online brokerages and the continuing progress in the Internet technology make trading stocks, bonds, futures or Forex a snap, not to mention that this also gives rise to lower and lower commissions and other fees as well.

Still, if you are a beginner you may find the whole thing a bit intimidating. You may be overwhelmed by the always growing number of trading ideas, strategies, methods, systems, each one seeming to be better than the other. Or by the always evolving technology: stock screeners, stock charts, stock trading services, and all that jazz.

How do you start? Where do you start? You begin to feel confused if not frustrated.

That’s understandable. The beginnings can be, and usually are, challenging. But it’s easy to handle this if you simplify things. Simple things are not necessarily worse than complex ones, so before you decide to embark on using the top notch trading technology, I suggest that you explore some really simple options, some basic yet solid elements that has been around for a very long time and are here to stay.

Moving averages are among such things. There are a few kinds of those, such as simple, exponential, weighted, and a few other types, but the difference between them is not what we are after here. In many cases, we will do just fine with the most basic of them: the simple moving averages.

So how can we use moving averages?

One way is to determine the trend. Take two moving averages of distinctly different periods. Say, 100 days and 50 days. To determine if the trend is up or down in a given market, just check if the 50 period average is above or below the 100 period average. In the latter case, the trend would be down. In the former one, it would be up. You can also use a longer period average, say 200 days, to find even stronger trending stocks in the broad market using exactly the same approach.

If you add one more moving average to the mix, you can create a simple trading system. This average should have the shortest period of all. Say, 20 days. We will use the other two moving averages to determine the trend and the new moving average to trigger the entry in our system. Namely, when this average crosses the 50 period moving average on the way up, we would open our position in the market. We will liquidate it when, for instance, the stock price closes below the main moving average, the one with the period of 100 or 200 days depending on how strong trending a stock you want to choose. Other exit strategies can be considered as well, but it is certainly a good idea to let the profits run and so too tight a stop-loss may not be advisable. Too generous one is not good either, though.

By: Waldemar Puszkarz

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