How to Trade With 20 and 200 Moving Averages

TL;DR

Use the 20-period moving average to identify directional momentum and potential entries on retracements, while using the relatively flat 200-period moving average as a possible price floor or ceiling. The indicators should complement price-action analysis rather than dictate trades, and flat 20-period averages should generally be avoided because they suggest sideways prices and weak momentum.

Transcript

I've made a little bit less than half a million dollars over the last nine months day trading stocks. This is my personal schwab brokerage account and I'm going to show you how to use the only two indicators I have ever used in my trading career. And by the end of this video, you're going to learn how to set up these indicators on your charts. How ... Read More

Key Insights

• The chart setup consists of two simple moving averages with lengths of 20 and 200. They can be added by selecting the simple moving average twice and changing the length setting for each line.
• The 20-period moving average is a trend-following tool that works best when visibly rising or declining. A rising line indicates bullish momentum, while a declining line indicates bearish momentum within an established directional move.
• A flat 20-period moving average suggests that momentum has weakened and prices are moving sideways. The presenter considers the indicator less useful under these conditions because it does not provide a clear directional trend.
• A rising 20-period moving average below price can function as a potential support area. During an established uptrend, retracements or consolidations near the line may identify locations where a trader could consider going long.
• A declining 20-period moving average above price can identify potential short locations. During an established downtrend, retracements or consolidations into the line may precede another downward move, although the indicator alone should not determine the trade.
• Extension is the distance between price and the 20-period moving average. A large distance can warn against entering in the direction of an already extended move and may sometimes support consideration of a reversal toward the mean.
• The 200-period moving average is preferably relatively flat for the approach described. It may act as a ceiling when prices trade below it and as a floor when prices trade above it.
• Indicators are intended to complement price-action analysis rather than drive market decisions. Using several indicators that produce conflicting signals can create analysis paralysis, weaken conviction, and make it harder for a trader to choose an action.

Questions & Answers

Q: How do you set up the 20 and 200 moving averages?

Open the indicators menu on the trading platform, search for moving average, and select the simple moving average twice. Open the settings for the first line and change its length to 20. Then open the settings for the second line and change its length to 200. The demonstration uses TradingView, while the presenter says he personally trades with Thinkorswim.

Q: How is the 20-period moving average used in an uptrend?

In an established uptrend, the 20-period moving average should be rising and positioned below price. The presenter looks for higher highs and higher lows, then watches for price to retrace or consolidate near the moving average. A touch or close approach can identify a potential long location if price continues respecting the rising line as support.

Q: How is the 20-period moving average used in a downtrend?

In an established downtrend, the 20-period moving average should be declining and positioned above price. The presenter watches for price to retrace or consolidate into the line before continuing lower. These approaches toward the declining average can identify potential short locations, but the moving average is meant to complement the broader reading of price action.

Q: Why should traders avoid a flat 20-period moving average?

A flat 20-period moving average suggests that the traded stock, cryptocurrency, or other market has lost momentum and is moving sideways. Because the line is neither rising nor declining, it does not establish a useful directional trend. The presenter therefore considers a flat 20-period average less effective for finding trend-following long or short setups.

Q: How can the 20-period moving average measure price extension?

Price extension is measured by observing the distance between price and the 20-period moving average. When price is very far from the line, the move may be too extended to justify a new entry in the same direction. The presenter may avoid going long under those conditions and sometimes considers a reversal based on an expected return toward the mean.

Q: How is the 200-period moving average used for trading?

The presenter looks for a 200-period simple moving average that is relatively flat, which differs from the preferred directional slope of the 20-period average. When price trades below the 200-period line, the line can act as a ceiling. When price trades above it, the same line can act as a floor for price.

Q: Should moving averages determine every trading decision?

Moving averages should not determine trading decisions by themselves. The presenter says indicators are designed to complement trading and specifically uses them alongside his ability to read price action. A slope, retracement, touch, or consolidation near a moving average provides context and a possible location, but it does not independently establish that a trade must be taken.

Q: Why does the presenter limit his chart to two indicators?

The presenter limits the chart to two simple moving averages because multiple complicated indicators may give conflicting signals. One might indicate buying, another selling, and another sideways momentum. That conflict can produce analysis paralysis, doubt, and poor decisions. Keeping the chart simple allows the moving averages to support price-action analysis without overwhelming the trader with competing information.

Summary & Key Takeaways

• The chart setup uses two simple moving averages with lengths of 20 and 200. The presenter configures them through the indicators menu on TradingView, although he says he personally trades with Thinkorswim. Volume is also used, but he does not classify it as one of the two indicators discussed here.

• The 20-period moving average identifies trend direction, potential entry locations, and price extension. A rising line below price supports bullish setups, while a declining line above price supports bearish setups. Retracements or consolidations near the line may provide entries when the broader price trend remains established and directional.

• The 200-period moving average is used differently from the 20-period line. The preferred 200-period average is relatively flat, potentially acting as a ceiling when price trades beneath it or a floor when price trades above it. Neither moving average should replace price-action reading or independent judgment.