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Monday, March 31, 2008

Charting 101: How To Use Trends - Simple Moving Average

Challenge Accounts:

Investing Account Balance: $201.92 ($0.46 Dividend paid)

Stock / Futures Trading Balance: $684.39
Online Savings Balance: $12.07

Personal Trading Thoughts: Cash. No positions. I'd say that primarily, today, I have a short to bearish outlook. But it 'feels' as if some semblance of normal volatility has returned to the markets. But 'feelings' can often be wrong. I expect the market mixed today. Could go up a little, or down a little. Reason being, is the volume. It's so light lately. I'm keeping a close eye on volume. It's been descending in the previous rallies, so if volume picks up when the market is heading lower? I'll keep that short-term bearish outlook. As far as the commodity markets? I have a 'long bias' and don't see anything on the horizon, though this can change at any time. I have this 'gut' feeling we are in the eye of the storm.

Personal Investing Thoughts: Cash is my largest position. I still hold all of my long term stocks. But I have a bearish outlook for the market. I should say that I'm prepared for a 35% drawdown from the highs. But who knows, as bottoms are a process, not an event. The market could bottom here. It might not. I prefer to bide my time and wait. If the recession is a short one (1 year) then the bottom could come any time as the market will be the first one out of the recession. If the recession is longer (2 years) then we haven't seen the bottom yet. I leave the predicting to God. I might take a nibble soon, but that's all it would be. A nibble.

Yesterday we covered the fact that markets tend to trend. We discussed that there are different types of trends. We discussed the different types of charts. We discussed the rules and importance of trends

Those being

1) Trends tend to continue until proven otherwise
2) Trends come in: Uptrends, Downtrends, and corrections.
3) Trends come in a few phases: Accumulation, Public participation, and Excess speculation.
4) There are long term trends, medium term trends, and short term trends. Usually the larger trend wins the fight when they collide, but this depends on what 'phase' the trend is in. (Accumulation, Public participation, or Excess Speculation)

Now, how to use trends? First you must identify what the trend is for any given time period. To do this? We use moving averages. Today I talk about the easiest moving average to construct - the "Simple Moving Average" or "SMA".

When you have your own brokerage? You don't have to do the math to construct the chart. You just use the chart tools to specify what type of moving average you would like to use? And then you input the time frame. In other words, you could specify that you would like to see a SMA, and then you'd choose the timeframe. Say, 5 days. The brokers charting tools should then plot out the 5 day SMA automatically on the chart for you.

Tomorrow we get into adding weight to the moving averages.

* * *

Investing Account Balance: $201.92 ($0.46 Dividend paid)
Stock / Futures Trading Balance: $684.39
Online Savings Balance: $12.07

Total Trades and Investments: 3
Largest Inter-trade Drawdown: $86.51
Consecutive Losing Trades (Drawdown): 2
Average Drawdown: $82.56
Average Loss: $82.56
Accuracy Rate: 33%
Average Reward: $179.75
Risk : Reward Ratio: 1 : 2.02

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research and tolerance for risk.

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