This commodity trade line has been around as long as the markets have
For as long as the stock market and charts have been around, using just one line, you would've been able to see where the market was going.
Before I show you why this line tells me the oil price is going up, first let me explain what it is.
It’s called the Simple Moving Average (SMA).
The moving average will show you the average price of a financial instrument (share, commodity, index etc…) over a certain period of time.
I know it sounds a little bit complicated but the example below should help you understand it better.
We’ll use the Oil price as an example:
Let’s say in the last five days, the oil price has closed at these levels.
Oil price day #1: $50
Oil price day #2: $48
Oil price day #3: $51
Oil price day #4: $53
Oil price day #5: $52
We have five closing prices of oil over the last five days. Now we have everything we need to calculate the moving average.
To do this we’ll simply add the five prices up and divide it up five days.
Just like in school when you calculated the average of something.
So you get: Price 1 + Price 2 + Price 3 + Price 4 + Price 5
= $50 + $48 + $51 + $53 + $52
This means that the $50.8 is the average price over the five days of oil prices.
And so we say, this is a 5 Day Moving Average or 5SMA.
So in your chart, you can make a point at that price.
And the next day there’ll be another average price according to the last five days.
Eventually, when you have weeks of data, you’ll see all the defined points on the chart. And when you join the dots, it makes a line.
This line is the Moving Average.
The line will simply smoothen out the volatility and erraticness of the commodity.
And this will help you identify what the overall direction of the trend is.
Note: Fortunately, all of our recommended brokers have this functionality in their trading platform.
Brent Crude Oil price chart with a 200 day Moving Average
The blue line signals the 200 Day Moving Average.
This means it adds the 200 previous prices of the oil price and divides it by 200 days, and plots it on the chart making a line.
What you need to know is this.
When the Brent Crude Oil price is below the blue 200SMA, oil is in a downtrend, as you can see in the chart.
And when the Brent Crude Oil price is above the blue 200SMA, oil is in an uptrend.
200SMA is the most used Moving Average in the world. It seems to be the perfect indicator to determine which direction a financial instrument is in.
At the moment, the price of Brent Crude Oil is on a strong uptrend as of January 2016.
This should tell you that the Oil trend is on its way up.
And you should only look at companies to buy that compliment the upside of oil.
There are two ways to profit from the upside of oil
Profit Opportunity #1: You can buy the Brent Crude Oil CFD and ride it up as long as the price is above the SMA. And also make sure you give some room for the stop loss.
Profit Opportunity #2: There are trades lining up with Red Hot Storm Trader that show me a strong correlation between oil and the shares that move in tandem.
Let me throw in that definition of a Moving Average again before we finish.
A moving average will show you the average price of a financial instrument (share, commodity, index etc…) over a certain period of time.
So it’s not so bad?
Now you know what to do with the Moving Average, go and practice on any financial instrument and profit away.
“Wisdom yields Wealth”