As the name indicates, moving averages look at trailing price data to identify trends. Doing so allows the flexibility of incorporating current information without the burden of deciding which specific points carry the greatest weight. By smoothing out an average, we can let the picture develop and trade accordingly.

There are many ways to apply moving averages to your trades. To get started, follow these five key guidelines:

1. Know your type – Most people will use a simple moving average (SMA). This approach averages all price points equally over a given time period. To take a 20-day SMA we would look at the last 20 days’ prices, assign each a weighting of 5%, and calculate the average. This is the process I prefer as the data remains pure and I do not influence the outcome. However, some traders believe recent data should receive precedence and weight those numbers more heavily. Whichever approach you choose, make sure you understand how the numbers are calculated.

2. Time – We can calculate MA using any time period. Generally, longer time periods work better for trends while shorter time periods are used for reversals. As the US Oil Fund (USO) chart shows, longer MAs have less volatility than shorter ones.

3. Trading systems – A popular trading approach is to use MAs within the double crossover method. This strategy entails buying an item when the shorter MA crosses above the longer and selling when the shorter falls below the longer. Applying this to USO would have resulted in large gains as the trader would have sold at the red arrow and bought at the green arrow.

4. Envelopes – Another approach is to draw trading bands, or envelopes, based on a percentage move from the existing MA. USO shows a traditional 20-day MA with 2.5% envelopes. When the price hits the higher level we sell, and when it hits the lower level we buy. In trending markets this process works well. However, when prices move sharply, envelopes fail.

5. Creativity – MAs offer a great way for us to experiment. Since MAs that are too short often cause false signals and those that are too long miss key reversals, we are encouraged to apply creative thinking and determine which approach works best.

In trending markets, MAs offer an excellent way to trade effectively and increase returns. Learn these guidelines and your chance for success increases.

Sean Hannon, CFA, CFP is a professional fund manager. He runs EPIC Insights Weekly (subscribe) the free Sunday market newsletter, and is the founder of EPIC Advisors, LLC. View All posts by Sean.

Further Education, Technical Analysis:

• Critical Support and Resistance Rules
• 5 Key Guidelines for Trading Stock Chart Channels
• How to Interpret Stock Chart Reversals
• Breaking Down Stock Chart Types
• 5 Great Chart Patterns to Watch for
• How to Read Stock Charts
• Top 5 best Free Stock Chart Websites
• Stock Chart Education Test (Answers)

To make the best option trades, stock option traders should understand these 6 key concepts about the option exercising decision:

1) Don’t exercise. Although an option owner has the right to exercise, it’s seldom a good decision. It’s far easier (and less expensive) to sell an option than to exercise. Although there are specific situations in which exercising is worthwhile, as a newcomer to the options universe, you can wait to learn about these exceptions.

2) ‘But not the obligation’ is a crucial part of the sentence at the top of this article, but it’s often ignored. I have been asked whether an option must be exercised. When you own an option, it’s your choice. You may sell an option, allow it to expire worthless, or exercise. But the choice is yours.

3) Automatic exercise. There is one (absurd, in my opinion) exception to the right vs. obligation issue. When expiration arrives, if the option is in the money by one penny or more (that means it has an intrinsic value of more than zero), the powers that be have decided that they have the right to break the contract and force you to exercise – unless you issue specific instructions to your top discount broker: “Do not exercise.”

That’s an unfair burden, but the rules were written to make money for your broker, not to protect you. Those ‘do not exercise’ instructions must be submitted shortly after the market closes on expiration Friday. If you own an option and are unable to sell it (because there are no bids), and if you don’t want to exercise, learn your broker’s notification method NOW, so you have the information handy, when it’s needed.

NOTE: This is a choice that only the option owner can make. If you are short the option, you may NOT request anything.

4) When you sell an option, you have no rights. Instead, you have an obligation. If the option expires worthless, then your obligation is canceled. If you are assigned an exercise notice (that means the option owner has exercised the option), then you are obligated to fulfill the conditions of the option contract. Once the option has been exercised, the option is canceled and no longer exists.

• If you are assigned an exercise notice on a call option, you must sell 100 shares of the underlying stock. You receive the strike price per share. You don’t have to do anything. Your broker takes care of the process for you. When you see your statement in the morning, it will show that you sold 100 shares overnight.
• If assigned on a put option, you must buy 100 shares of the underlying stock at the strike price. Again, the process is automatic.
• Thus, you cannot request or demand that the option owner exercise the option. You cannot request that the option be allowed to expire worthless. You can do nothing except wait for the decision of the option owner.
• The only action you can take – if you don’t want to be assigned an exercise notice – is to purchase the identical option you sold earlier. That purchase cancels your obligation – but only when you buy that option before you are assigned an exercise notice. Once you receive that notice, the exercise process has been completed and cannot be reversed. You may trade to eliminate the stock position from your portfolio, but the exercise/assignment cannot be undone.

5) Some index options ‘settle in cash.’ These are European options and there is no need for you to be concerned about this for the moment. No shares exchange hands. Instead, the option is canceled and the intrinsic value of the option is transferred (in cash) from the person who was assigned an exercise notice to the person who exercised the option.

6) Similar terms. These option terms are often used interchangeably, but they all have the same meaning:

• Assigned an exercise notice
• Assigned
• Received an exercise notice

Mark D Wolfinger is a 20 year CBOE options veteran and the author of the book, The Rookie’s Guide to Options (Read our full review). Visit his blog, Options For Rookies and follow him on Twitter!

Other Recent Option posts:

• 7 Reasons Investors Should Trade Options
• 9 Option Terms Every Investor Should Know
• The Key Differences Between Options and Stocks
• The Rookie’s Guide to Options, Book Review
• Entering an Order to Buy or Sell Options Investor Series, Part I

Blogging Idol 2 will be a fantastic way opportunity for us here at StockTradingToGo to test out a variety of different techniques and ideas on building RSS readership.

Points are awarded by achieving the highest increase in RSS number, receiving a lot of votes for your blog (popularity contest), and there are three points awarded by the judges. Contest updates will be made weekly on the DailyBlogTips blog.

You can view the live scoreboard by going here. Our official start number is 1371 subscribers and my personal goal is to end the month with a number above 1500. At the end of the month I will summarize all the ideas implemented here on the site so you can perhaps try them on your own.

Congratulations to The Stock Speculator who ended the month of October with 33 total comments. rhinodude47 ended in second with 25 total comments.

The Stock Speculator wins a $50 gift certificate to Amazon.com courtesy of stocktradingtogo.com. Nice work!

Final Leaderboard below:

• The Stock Speculator (33)
• rhinodude47 (25)
• Matt (20)
• Brandon (13)
• kanerd (13)
• market folly (6)
• Matt B (5)
• StockJunkie (5)

More information regarding the end of comments on posts to follow here soon (Note: comments are still enabled for this post).

For the month September commentator Matt had 23 total comments and as a result is rewarded with a $100 gift certificate to Amazon.com. Nice job Matt!

September top Commentators were Matt (23), Brandon (20), The Stock Speculator (18), rhinodude47 (17), kanerd (8), RayJMan (8), Matt B (4), and Alex – My Trader’s Journal (4).

How To Be A Top Commentator

The top eight readers that leave the most comments are displayed live on the right sidebar throughout the month which include live linkbacks to personal websites.

Being a top commentator is not only a fantastic way to get involved in the community but also to get free traffic to your site and win great prizes. Now what should we hand out at the end of October…

With the NASDAQ Composite finishing today at 2326.20, the closest guess belongs to thewild1 with his guess of 2340.02. The top three leader board:

1. TheWild1 – Guess 2340.02 – Difference 13.82
2. RayJMan – Guess 1245.52 – Difference 19.32
3. Aaron – Guess 2297.97 – Difference 28.23

Thanks for those readers who participated, and if you have yet to give you vote in the latest STTG reader poll on what your favorite content is, please do so NOW!

Have a great weekend .

Simply leave a comment with this post of the exact price (to the penny) that you think the NASDAQ Composite index will close at next Friday, January 25th, 2008.

There will be no $5,000 prize for being the closest guess, but I will put everyone’s entries into an excel sheet and shoot some link loving throughout the week to those that are closest to the actual price.

To help you out, here is a chart of the NASDAQ Composite as of the close today, Friday the 18th,

NASDAQ Close $2340.02, Click to View

Next Monday the 21st is a holiday for the market, so the last call for entries will be Monday night, 8:00 PM EST.

To kick things off I am going to put my guess in at $2,420.56 as I am a bull at heart.

Prizes up for grabs this month include a featured posts site mention, two sets of 1 month text links, and two amazon.com gift certificates.

1. Top commentator (reader who leaves the most comments) wins a individual mention here on the blog of their site, their feed, and 5 of their favorite posts they want STTG readers to read. Also, they win a free site wide text link in January.
2. 1st runner-up top commentator wins a free site wide text link in January.
3. 2nd and 3rd runner up top commentators will receive a $10 gift certificate to amazon.com.

Being a top commentator is easy, after reading any article here on the STTG blog simply leave a comment by scrolling to the end of the article and filling out the comment form. (Note: The comment form does not appear on the site homepage).

The top 8 readers that leave the most comments are displayed live and proud on the site throughout the month. Good luck .