Viewing the chart below, the majority of price appreciation occurs when the NMAC Line is above the zero line. As long as the NMAC is above the zero line, I tend to stay in the trade. Even if the NMAC is heading down, but still above the zero line, the stock does not fall very far. However, once it crosses below the zero line the stock falls much faster.
The second part of the strategy deploys three moving averages on the price chart. This strategy is not linear. There is no step one and step two and so on, rather you look for opportunities wherever you can find them. You can also adjust the strategy to work with your own psychology / emotions.
Take a look at the chart below. You will find the aforementioned three custom moving averages created here at Norstar Trader; the Fast Line, the Bull/Bear Line and the Termination Line. These are used as support and resistance lines. If the NMAC breaks to the downside, look for support to come in on one of these lines.
Going further along the same chart below, we see where the NMAC broke the zero line and that takes us out of the trade because there was no immediate support below by the moving averages. The question remains where do we get back in?
When the NMAC crosses positive it is time to get back in the trade, but be careful because it can turn against you. In this example, the NMAC turned up, price cleared the Bull/Bear Line and started to rise from there. Notice though that no real price appreciation occurred until the NMAC crossed over the zero line to the upside.
General Guidelines I use for Short Term Investing
- NMAC over the zero line is usually always a good thing. The only time I sell when the NMAC is over the zero line is to take some profits or possibly sell a covered call to grab some profits if it is very high and beginning to fade.
- The moving averages work as support levels when the NMAC falls below the zero line. There are plenty of times that you DON'T SELL the stock if the NMAC falls below the zero line and there is a support line like the Fast Line or the Bull Bear Line close by.
- The objective is to stay in the trade as long as possible.
- ONLY CHOOSE well vetted stocks that are highly rated by industry analysts. Use Tip Ranks to analyze a stock ratings or Short Term Invest in the Indexes.
- Anything below the Termination Line I won't touch but I will enter into trades that are emerging from below this line. Once it crosses to the top side it may be a good entry point. Check the NMAC before entering the trade.