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Wednesday, July 18, 2012

Fabulous 200 day moving average

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.
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Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.