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What is the 200MA and why it is crucial to your trading success

by , 19 February 2020
What is the 200MA and why it is crucial to your trading success
Q. "When it comes to Red Hot Storm Trader, what is the criteria you use to find the perfect markets to trade?"

A. In short, I look for the highest volume traded stocks on the JSE.

To find these stocks, I have a simple yet effective 2-criteria checklist.
 
Criterion #1:
Market cap needs to exceed over 20 billion
 
The market capitalisation is equal to the total number of shares multiplied by the share price.  
 
When a stock has a market cap of over R20 billion, it qualifies as a Blue Chip stock.
 
Blue Chip stocks are the most popular, established and heavily invested stocks on the JSE.
 
Very seldom do you see them go into liquidation or suspension.
 
There’s a level of comfort when trading these stocks and that’s why you’ll find them on my watch list…
 
Criterion #2:
500,000+ shares traded per day
 
Next, there needs to be over 500,000 shares traded per day with each stock.
 
This volume will ensure two things:  
 
~ You won’t have to worry about the price jumping too much
 
When you have a stock that is trading over 500,000 shares per day, this means we won't need to worry about the buy and sell price jumping too far away from each other, taking us out of our trade.
 
~ Stronger trends to ride and profit
 
Markets that have over 500,000 shares traded per day, generally move in strong trends (up and down).
 
This is because when good news comes out, buyers essentially buy – sending the price up.
 
And when bad news comes out, sellers sell – taking the price down…
 
It’s these kinds of strong trends, as short-term traders, we can take advantage and profit from…
 
Once a company has met the 2-criteria checklist, I then add the stock onto my Red Hot Storm Trader watch list for future trading signals... 
 
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Q. "Timon in your article about why you expect the Bitcoin price to rise due to the crossover with the 200 moving average, I guess my only question is...
 
What is so special about the 200-day moving average?”
 
A. Nobody knows for sure why investors and traders choose 200 days, as the catalyst for buying and selling, but here are some speculations around it.  
 
Theory 1:
200 working days in a year
 
First, there are roughly 200 working days in a year which means in general the markets trade 200 days out of each year.  
 
Theory 2:
Psychological barometer
 
Second is that, 200 is a nice round number for investors to follow and base their buying and selling decisions on.  
 
When the market’s price moves above the 200MA, you can expect the price to rise as this will signal a major buying opportunity due to the increase in demand…
 
Theory 3: (Advanced)
Price acts as an elastic with the 200MA
 
No matter what highly traded market you plot the 200MA on, you'll see the same thing.  
 
When price is far away from the moving average, it acts as an elastic band which drives the price back to it.
 
In technical terms we call this the ‘standard deviation to the mean’.
 
Which essentially means, the distance the price moves away from its average price.  
 
I can carry on with the reasons, but at the end of the day you shouldn't only depend on the 200MA.
 
It's just another confirmation element you should keep in mind with your trading strategy.  
 
If you missed the article that explains the 200MA, click here to catch up… 
 
Trade well,
Timon Rossolimos,
Analyst, Red Hot Storm Trader
 
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What is the 200MA and why it is crucial to your trading success
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