Posted on 03/18/2007 1:21:24 PM PDT by BenLurkin
What does this very well known technical indicator mean for us as traders? At TradingMarkets we look at the 200-day MA as the cut-off in determining whether a stock or market is in a bull market or a bear market. We take long trades after we get a buy signal ONLY if the stock or market is above its 200-day MA. We take short positions after we get a sell signal ONLY if the stock or market is below its 200-day MA. So what is the big deal about this line that is drawn on our charts?
There are several technical indicators or patterns that point us to whether we are in a bull market or a bear market. Why is this moving average line on our charts the "line in the sand" in determining whether we are to be buying the market or selling the market? As with all of the trading strategies that we have come up with at TradingMarkets, we seek to find a behavioral pattern in the stock market, find the edge that it creates and then statistically quantify that edge. The behavioral pattern we see with the 200-day MA is quite simple. Literally everyone who is a market participant who looks at a chart of their favorite stock or market knows where the 200-day MA is on the chart. It is one of the most-watched of all technical indicators.
In my almost 20 years working on Wall Street for big brokerage firms, banks, investment banks, investment advisors, and hedge funds, the one indicator that everyone universally kept an eye on was the 200-day MA. Whether these participants were seasoned technical analysts, portfolio managers, traders, analysts, or inexperienced new traders or retail investors, the one technical indicator that they all watched was the 200-day MA. Even analysts and portfolio managers who only looked at fundamental research and didn't believe at all in technical analysis would look at this one indicator. These portfolio managers and analysts that work for big mutual funds, pension plans and hedge funds represent the institutional money in the market, and they are considered the "big players" in the market place. As a general rule, these "big players" feel comfortable putting money to work in a stock or a market when they are trading above their 200-day MA. When the stock or market falls below the 200-day MA, they are less likely to put new money to work in that particular stock or market or to defend their position if the stock or market drops. So this is the behavior that occurs over and over again with almost all of the market participants and especially with the "big players" in the market who are in charge of deploying the enormous amount of money that people from around the world have invested in mutual funds, pension funds and hedge funds. So this is the behavioral pattern that creates an edge for us as traders.
In testing our trading strategies, we have statistically seen over and over again that a clear edge exists when a buy signal is triggered and the market is trading above its 200-day MA. Do these buy signals work if the market is below its 200-day MA? Yes they do, but there is a greater probability of success with a long trade when the market is trading above its 200-day MA. We have results after results that prove that there is a definite edge that exits in buying long signals when the market is above this moving average, or short trades when the market is below its 200-day MA. Remember, the big institutional players will put money to work in the market when it is above the 200-day MA and will step aside when it is below. We want to be trading on the same side or with the big institutional money. Again, this will greatly improve our probabilities of success and is the reason why every TradingMarkets trading strategy lists this as a qualifier or filter before you can consider it a true buy or sell signal.
Sorry for an ignorant question, but wouldn't it be cheaper [and more profitable] to buy when the market [or an individual stock, assuming it will recover eventually] is priced UNDER its moving average, i.e. is down? Ditto for the selling - better to do it when the thing is up, above its moving average. The argument advanced in the posted article sounds counterintuitive.
You do not want to buy stocks when the averages are in a downtrend. You do not want to be in cash or betting stocks will go down in price when the main indexes trend higher."
Au contraire. When I'm buying Vanguard index 500 mutual fund, I'm trying to time my purchases to when it is going down, and not up.
Interest rates are headed up - sell. Hold on, they're heading down - buy. President Bush fell off his bike - sell. The Palestinians are rioting - sell. Hold on, the defense sector is moving - buy. The sky is falling - sell. The sky is not falling - buy. 30 people were killed in a bomb blast today in Baghdad - sell. One of the Bush daughters has signed a book deal - buy. Libby will be convicted - sell. Cheney has a blood clot - sell. No wait, he's OK - buy. Cpt. America has been shot - sell. Brittney Spears has entered rehab - buy. She's left - sell. The NYT has lost revenue this quarter - buy, not wait, sell. Pete Rose says he did bet on games he managed - sell. It will rain in New York tomorrow - sell. It won't rain in Chicago - buy. Kirin Chetney was fired from Fox - sell. Kirin Chetney is hired by CNN - move money to gold.
The market is controlled by old men whose hormones have dried up - sell...no wait...
Just giving you a quote from IBD. Good luck.
a rising tide lifts all ships
buy a good stock. when it goes up sell it. if it doesn't go up don't buy it.
Anyone can invest successfully in equities -- they need only have a good head.
Looks like a good candidate for your "Profit Center" PING LIST (Economy, Financial Markets and Investments)
Profit Center Ping (PCP)
Economy, Financial Markets and Investment Ping List
I've read somewhere that the stock market is a giant pump that pumps money from the sheep/crowd into the pockets of the savvy investors. If you're trading with the crowd, odds are you're one of the sheep, enriching the guy on the other end of the trade.
So avgs are in a downtrend, you don't buy based on that, and you miss the reversal in the trend. There's no silver bullet for investing. But one must have hard rules by which he invests/trades, and stick to them.
"So avgs are in a downtrend, you don't buy based on that, and you miss the reversal in the trend.'
Do what you like. I don't need to hit the "trend" at the exact top or bottom. I'll watch which way the trend is going, try to take advantage. Cut losses quickly, take the profits when they hit my goal. If that makes me a sheep, baaah.
Don't get me wrong - all I'm saying is trading based mostly on trend direction is not necessarily *the* idea. If you have a trading model/rules that work for you within the trend, great!
I know there are plenty of different ideas. The original quote from IBD was just an attempt to answer the first question on why folks watch the 200 day moving avg.
What I need is something to narrow down that huge universe of stocks. Trends seem to help. :-)
One thing also to look at is the options activity. If the trend is down, but some hedgie is buying 15000 calls of something, you can bet he knows something more than the rest of us.
Research and buy the very best companies in each industry. Typically they will be the overpriced stocks. Pick a day each year to reposition your portfolio. Diversify and sleep at night. Put about 10% of your portfolio into speculative and story stocks, money that you can afford to lose. Those are the stocks that make trading fun.
That is how I invest and I have averaged between 12-16% growth per year over the last 7 years. I didn't include the speculative stocks. I have done better with them, but they have a tendency to plummet and die. So mentally, I am only using play money with them.
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