Wednesday, April 18, 2012

Understanding and Using the 200 Day Moving Average System

Understanding and Using the 200 Day Moving Average System
The 200 day moving averages are indicators which help in technical analysis using average values of security prices over a specific period of 200 days. These averages are used in measuring the momentum of the market and to define the areas of potential support and resistance. Moving averages are based on past prices and not the current ones; this is why they are lagging. Moving average does not predict the future of prices but simply defines the existing smooth prices. These indicators are the building blocks of the principles applied by other indicators as well.
Characteristically, when a short term average becomes higher than a long term average an upward momentum is confirmed. Similarly when the short term average drops below the long term average a downward momentum is confirmed.
Use of the This Indicator
It can be used as a trend identifier. The market keeps changing and because the averages are lagging this helps traders through studying the slope of the indicator. As the slop changes the trend changes and the traders can watch the movement of prices. If the slope is upward, it is an uptrend, and if it is downward, it is a downtrend. There are 3 types of trend indicators that tell the trend. These include:
i) Multiple moving averages: this uses the 100, 200 and 400 EMA. When all the three are sloping in the same direction at a good angle and separation, it shows a good trend. When all three are clustered together, it represents a period of Consolidation. For Example;
ii) MACD indicator: in this case all a trader needs to do is to check if the trigger lines are above or below the zero line/ centerline. If the 2 lines are above the zero line, it is an uptrend, and if it is below, then it is a down trend.
iii) ADX Indicator: this indicator works better for strengths of the trends obtained from the graphs above. When the ADX points upward, the market trend is strong and vice versa. The graph below explains better:
It can also be used as a strength identifier. When there is an uptrend, there can still be two forms of strength. These are; Trending and Quiet, and Trending and Volatile. The graphs below represent these two principles:
From these graphs it can be observed that when the slope is less steep, it is the trending and quiet market. When the slope is steeper, it is the trending and volatile market.
This indicator can also be used to analyze support or resistance levels in the market. The market generally respects the data in moving averages more than other EMAs and this makes it the most significant type of indicator to use. The diagram below explains why:
It provides entry signals for traders. When prices rise up traders can enter for the long trade. Similarly if the price moves below the average, the traders can go for the short trades. Likewise traders in the long trade can exit when the prices move below the average and enter when the prices are above the average.
Application in leveraged ETF's is also a use of this indicator. It helps traders by guiding them on how to keep their trading toward the right side of the market for both stocks and ETFs.
Therefore to conclude, this indicator is one of the best and easiest one to use, and has also been recommended by Forex.
The 200 day moving average system is one of the best trading indicators according to most traders. This is not just because it is easy to use and understand but also because of its flexibility in trading.
You can use it while trading forex and Binary Options
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