Add these market “guides” to your charts to help spot trends
In today’s profit Watch:
• All eyes on the Fed
• How moving averages spot trends
• PLUS: Using the crossover to signal your trade
Markets are waiting on the US interest rate decision tomorrow at 7pm. Even if the markets expect a 25-basis point hike, it’s by no means guaranteed.
More importantly, it’s the language used in the accompanying statement from the FOMC bigwigs that could be the catalyst for moves in either direction for the dollar… and stocks… and gold.
Rather than speculate on what may or may not happen, let’s stick to what the charts tell us once the news is out. Then we can focus on potential new trade set-ups.
Meantime, I want to have a look at what must be one of the simplest tools you have in your trader’s toolkit. Because once you know how to use it, it’s also one of the most effective.
I’m talking about the moving average. You’ve got this tool on your chart package and you can use it on pretty much anything you like: forex, indices, shares, commodities, whatever.
So what can you do with moving averages? I’ll get to one rather exciting idea in a moment. But first things first…
For one thing, moving averages are good for finding and sticking with trends.
And as we know, it’s best to trade with trends. So half the battle of trading is looking for the trend.
Well, the great thing about moving averages is that they’re good for doing just that: helping you spot trends.
How moving averages can complement your trend analysis
Used properly, ‘moving averages’ can be a powerful guide to spotting a market that has just changed its trend – either up or down.
Let’s take a look at how you can use them to identify and buy into profitable movements… and ‘short sell’ markets that are about to dive.
Take a 30-day moving average for example.
You calculate a moving average by taking the last 30 days’ closing prices and dividing the total by 30.
Your spread betting company’s charting package does this for you. It just plots it on your chart.
And the moving average functions much like a trend line.
You can see it either rising smoothly beneath the zigzag line made by a rising price, or curving down above a series of falling peaks.
In this chart, the green line is the 30-day moving average. The red is the 100-day moving average.
Moving averages are in effect a curving trend line and are useful as a trend following device. They can help you obey that all-important rule of allowing your profits to run.
What I’ve found though is that moving average techniques need to be filtered slightly in order to eliminate some false signals. This is especially relevant when the price is broadly range bound.
Why two averages are better than one
For example, a price rising through its short-term moving average alone does not give a ‘buy’ signal.
This is because the price might fall back through the short-term average again. This method could generate numerous signals to buy and sell in a sideways market and, before long, would see you buying repeatedly at the top of the trading range and selling at the bottom.
That’s why it’s worth adapting to use moving averages in different ways. One such method involves the use of two moving averages.
Let me give you an example using the 30-day average in conjunction with a longer-term one of 100 days.
Signals to buy and sell are generated when these two averages ‘cross’ over. A further refinement is to only act when both of these averages are moving in the direction of the proposed buy or sell signal.
Using the crossover to signal your trade
So, in the case of a buy signal, the short-term moving average should cross above the rising longer-term average. This is referred to as a ‘golden cross’.
Possible buy signals, therefore, will occur only when the shorter-term average rises above the rising longer-term average.
The same applies on the downside for ‘sell’ signals. The shorter-term average falls below the declining longer average.
In that chart above, you can see we had a valid sell signal back in May. And in the following few months, the stock in question went on to fall steadily and significantly.
We’ll look at these some more another time. But why not have a play around. Bring up a chart of a market you like to trade. And then stick some moving averages on there – say the 30- or 50- and the 100.
Look for crossovers – or simply look at how the price reacts when it gets close to these moving averages.
Not long left to get in on this…
And as I mentioned earlier, we’ve been astounded by the response we’ve had to the new trading service we launched recently, Pickpocket Trader.
It’s unlike any other trading service we provide, and if you’re keen to keep a strict lid on your market risk in these volatile times, I think you’re going to love what “Trader X” has put together.
But just a friendly heads-up, there’s a strict membership limit on the service, capped at 300 places. That limit is almost filled. And whatever happens, the doors to this will close this coming Sunday.
So if you want to put this quirky strategy to the test, my recommendation is get in now, before you miss it! (Don’t forget it comes with our rock-solid 60-day trial period and money-back guarantee in case you take a look and decide within that time it’s not what you’re looking for. But be sure to at least take a look and see how the first few trades Trader X sends you pan out. It’s quite a buzz, believe me!)