The Perfect Moving Averages for Day Trading

Day traders need continuous feedback on short-term price action to make lightning-fast buy and sell decisions. Intraday bars wrapped in multiple moving averages serve this purpose, allowing quick analysis that highlights current risks (as well as the most advantageous entries and exits). These averages work as macro filters as well, telling the observant trader the best times to stand aside and wait for more favorable conditions.

Choosing the right moving averages adds reliability to all technically-based day trading strategies, while poor or misaligned settings undermine otherwise profitable approaches. In most cases, identical settings will work in all short-term time frames, allowing the trader to make needed adjustments through the chart's length alone.

Given this uniformity, an identical set of moving averages will work for scalping techniques—as well as for buying in the morning and selling in the afternoon. The trader reacts to different holding periods using the charting length alone, with scalpers focusing on one-minute charts, while traditional day traders examine five-minute and 15-minute charts. This process even extends into overnight holds, allowing swing traders to use those averages on a 60-minute chart.

5-8-13 Moving Averages

The combination of five, eight, and 13-bar simple moving averages (SMAs) offers a perfect fit for day trading strategies. These are Fibonacci-tuned settings that have withstood the test of time, but interpretive skills are required to use the settings appropriately. It's a visual process—examining relative relationships between moving averages and price—as well as moving average slopes that reflect subtle shifts in short-term momentum.

Increases in observed momentum offer buying opportunities for day traders, while decreases signal timely exits. Decreases that trigger bearish moving average crossovers in multiple time frames offer short sale opportunities, with profitable sales covered when moving averages start to turn higher. The process also identifies sideways markets, telling the day trader to stand aside when intraday trending is weak and opportunities are limited.

Examples Using Moving Averages

Apple Inc. (AAPL) builds a basing pattern above $105 (A) on the five-minute chart and breaks out in a short-term rally over the lunch hour (B). Five, eight, and 13-bar SMAs point to higher ground, while the distance between moving averages increases, signaling rising rally momentum. Price moves into bullish alignment on top of the moving averages, ahead of a 1.40-point swing that offers good day trading profits.

The rally stalls after 12 p.m., dropping price back to the eight-bar SMA (C), while the five-bar SMA pulls back and finds support at the same level (D), ahead of a final rally thrust. Aggressive day traders can take profits when price cuts through the five-bar SMA or wait for moving averages to flatten out and roll over (E), which they did in the mid-afternoon session. Both price levels offer beneficial exits.

Apple stock consolidates near $109 at the end of a session (A) and ticks lower the next morning (B). five, eight, and 13-bar SMAs point to lower ground while the distance between moving averages increases, signaling rising sell-off momentum. Price moves into bearish alignment on the bottom of the moving averages, ahead of a three-point swing that offers good short sale profits.

The sell-off stalls mid-morning, lifting price into the 13-bar SMA (C) while the five-bar SMA bounces until it meets resistance at the same level (D), ahead of a final sell-off thrust. Aggressive day traders can take short sale profits while the price lifts above the five-bar SMA or wait for moving averages to flatten out and turn higher (E), which they did in the mid-afternoon. Both price levels offer beneficial short sale exits.

Signals to Stand Aside

Interrelationships between price and moving averages also signal periods of adverse opportunity-cost when speculative capital should be preserved. Trend-less markets and periods of high volatility will force five, eight, and 13-bar SMAs into large-scale whipsaws, with horizontal orientation and frequent crossovers telling observant traders to sit on their hands.

Trading ranges expand in volatile markets and contract in trend-less markets. In both cases, moving averages will show similar characteristics that advise caution with day trading positions. These defensive attributes should be committed to memory and utilized as an overriding filter for short-term strategies because they have an outsized impact on the profit and loss statement.

Apple bobs and weaves through an afternoon session in a choppy and volatile pattern, with price whipping back and forth in a one-point range. Five, eight, and 13-bar SMAs shows similar whipsaws, with multiple crossovers but little alignment between moving averages. These high noise levels warn the observant day trader to pull up stakes and move on to another security.

The Bottom Line

There is no perfect set of moving averages. The five, eight, and 13-bar simple moving averages do offer relatively strong inputs for day traders seeking an edge in trading the market from both the long and short sides. Also, this technique works well as filters, telling fast-fingered market players when risk is too high for intraday entries. Nonetheless, individuals seeking alpha should also consider other simple moving average parameters and even other technical analysis indicators.

Correction—May 28, 2023: A previous version of this article incorrectly used the word "rollovers" instead of "crossovers."