200
day moving average (both simple and exponential) is probably the best known and
most reliable technical that there has been for a long time. I know that I have
said that about RSI and MACD in my previous posts. However, if we talk about
determining direction of a trend and key support and resistance levels no other
technical indicator could replace 200 moving average. The indicator can be used
on all time frames for trend, swing and day trading. This indicator on long term
charts helps you to identify long term tendency, on medium term charts (4-8
hour charts) medium tendency and on short term charts (5,15, 30 minutes and 1
hour) short term direction.
If
we talk about direction it is important to check whether 200 moving average is
below or above price of a given security. If the indicator is below the price
we have a downward tendency. If it is above price the tendency is upwards. If
you see that the price has gone below the moving average (on daily charts) you
should start trading a given security from the short side only (selling). If
(on daily charts) the indicator is above security price you should trade only
from long side (buying).
Most
traders like trading 200 simple moving average together with 50 day simple
moving average. You would not see a crossover of the two on daily charts, but
it quite often happens on hourly charts. This is pretty strong indication of a
trend change.
The indicator also works as support and resistance
determinant in both bull and bear markets. You would be amazed to see how often
it serves as important support and resistance level on various time frames.
Combined with price action signals it can be a very powerful tool to trade in
range bound market.
One should also remember that all technical indicators
are of lagging origin and you should not put too much confidence in them. The
same can be said about 200 simple moving average. It does not show you possible
future price action in securities. So, you should not forget to use as many
technical and fundamental tools as possible. When you find that most of them
start pointing the same thing you should react accordingly.
You should also have in mind that practice makes
perfect. Therefore, make some demo trades before you do anything on a real
account. Hope you will find the indicator useful.
See also:
Disclaimer
Trading
financial markets carries a high level of risk, and may not be suitable for all
investors. All information on the blog http://trend0.blogspot.com/ is of educational
nature and cannot be considered as advice, recommendation or signals to trade
in any financial markets.