In today’s computerised world of trading, we have so much available to us to analyse the markets that we’re literally spoilt for choice.
In fact we’re so spoilt for choice it can be easy to focus solely on the latest cutting edge indicators. Trying to predict the market and forgetting to look at some of the basics.
You’re familiar with the clichéd saying “The trend is your friend”. Now this saying drills down to the very basics of trading, and is probably the most overlooked point to remember when trading. And that’s where the 200 day moving average comes in.
One of the simplest indicators you can look at when trading might be the most powerful
The 200 day moving average gives you a clear idea of the markets trend over the last year.
This moving average is calculated by taking the closing price for the last 200 days, and averaging these prices. By looking at the line that plots the average that is returned by this calculation, you’re able to determine the long term trend of a share.
This moving average is important because it’s what the large institutions use as a guide to the future performance of their investments. If this moving average starts to decrease it’s a heads up that the trend is changing and the institutions may look to get out of some of their holding of the share concerned.
Now look at the 50 Day moving average to spot short-term opportunities
Now we’ve established what the long term trend of a share is we want to find an opportunity for profit.
So we add the 50 day moving average to our chart.
By adding this shorter term indicator, you can now see if there’s a change in the overall trend of a share early enough to make some money off the change. By looking for the crossover between the 50 day and 200 day moving averages, you’ll get an early warning that the trend is going to change.
By being able to enter a trade before the institutions start to move, you’ll often be able to make a healthy profit over a short period of time.
A great example is Gold. Gold has been trading above its 50-day and 200-day moving averages for the past month and much of the past year. That’s why Trader X and Global Macro Trader have opened long CFD positions recently in gold stocks like Goldfields and Anglo Gold.
If you’d like to get in on these short term leveraged profit opportunities but don’t have time to do the analysis yourself, then why not follow Trader X. You can sign up here.
