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Quant Talk: What Is the T-Line?

Stocks in this article: SPY ALK

NEW YORK (TheStreet) -- Have you heard of the t-line? Many traders and investors alike are using the t-line as an indicator for entering and exiting trades with great success.

A candlestick swing trader named Rick Saddler coined the term "t-line" while working in his trading room.

The t-line is the 8-day exponential moving average, or the 8 EMA. An exponential moving average puts more emphasis on recent data than on older data. A moving average takes a subset of data and averages them to accentuate trends and help traders make decisions about buying and selling.

Rick isn't the first person to use the 8-day exponential moving average; he just coined the term and developed a trading strategy based on the t-line. That strategy is becoming more widely used by all types of traders.

The simple rule of the t-line is that if you are in a long trade, you want the price action to close above the t-line to stay in the trade. The opposite is true with short trading. You want to stay short if the stock closes below the t-line. As with all signals and chart patterns, there needs to be confirmation or follow-through the following day.

A key component to using the t-line correctly is to always get confirmation. On daily charts, confirmation comes when the following day's candle has fully formed. (The candle is a chart of a stock's price, generally over the course of a full day. It shows that price in a candle-shaped form, with the candle body as the range of the stock price from its high to low over that time frame.) Confirmation is necessary with any chart time frame. If you trade the 4 hour chart, confirmation comes when the next 4 hour candle has fully formed, and so on.

The t-line works with all trading plans. It works best when trading on daily candlestick charts. It works on monthly, weekly, daily, 4-hour, 1-hour, 30-minute and even 15-minute charts. But it's not as reliable on the 1-minute, 5-minute and 10-minute charts.

With that in mind, the t-line is most beneficial to the swing trader. Long-term investors can use the t-line, but investors aren't typically getting in and out of trades as the price action goes up and down within an upward channel.

Set up the t-line on your charts and watch for yourselves. It is quite simple.

Let's look at some charts now.

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