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Charts 101: Cutting the Noise To Focus on Profits

The extreme volatility stock markets are going through can make it hard for investors to pick out an overall trend, but the technical analysts’ tool of Dual Moving Averages can help cut out the noise to focus on profits, Sandy Jadeja, chief market strategist at ODL Securities, told CNBC.

“With a Dual Moving Average, the key is really a crossover. So when we have two moving averages, one is a shorter-term moving average and the second one is a longer-term moving average,” Jadeja said.

On any given stock chart, investors can track the 20-period moving average against the 40-period and look for the crossovers, he said. When the 20-period crosses above the 40-period, it gives a buy signal and vice versa, Jadeja explained.

Investors can vary the length of the periods they use depending on their time horizon, he added.

- Watch the full interview with Sandy Jadeja above.

Short-term investors can use periods of days, hours or even 5 minutes, but longer-term investors should be looking at weekly or monthly periods. But even day traders should pay attention to the longer-term trend signals, according to Jadeja.

Investors only following the short-term period signals would have been whipsawed by multiple buy and sell signals in recent months, Jadeja said when looking at the Dual Moving Average patterns on a FTSE 100 chart.

If investors had followed the principle from 2005 to February 2009 on the FTSE, it would have given just under 4,000 points in terms of profit, or just under £40,000 on a single contract basis, according to Jadeja.

“It would have kept you out of all the noise, you would have performed much better than the market and you would have been on the right side of the trend,” he said.

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