At the end of last year, I wrote to you about the “big picture” indicators called “golden crosses” and “death crosses”.
In simplest terms, a golden cross is when the 50-day Moving Average crosses above the 200-day moving average; and a death cross is when the 200-day MA crosses above the 50-day MA.
If you’d like a bit more detail about what these are – you can check out the email on the archive here.
Taking note of FTSE Stock Market Trends
Why have I decided to bring up the subject of death crosses on the Friday before Easter?
Well, I don’t want to put the fear of God into any bulls out there – but … have you seen the potential death cross building up on the FTSE charts?
One to watch…
The slow-moving 200-day moving average is a bit of a dinosaur of a technical indicator – it lumbers along giving little away for months at a time, but when it does rear its head – traders sit up and listen because it can sometimes signal certain FTSE stock market trends.
Lagging indicators like moving averages often suffer from bad PR. For a start, the name “lagging” – doesn’t really do them any favours. “Leading” indicators definitely sound like they’ll be more useful – like they’ll give us the edge if we want to “get in” on market moves.
Leading indicators just don’t have the reliability that you get from lagging indicators. And to ignore the importance of moving averages is a big mistake, largely because they provide us with excellent information about trends.
And trading with the trend with the FTSE is always going to give you a better chance of being profitable than trading against the trend. This is a simple fact that can too often get lost under a haze of technical indicators. It’s amazing how easy it is to lose track of the underlying trend when we’ve layered our charts with a mountain of indicators telling us that the price will go this way, or that way.
Reading moving averages – the basics
When it comes to technical analysis, moving averages are about as basic as it gets. A simple moving average is just that – an average of the closing prices over a set timeframe.
If the market is in an uptrend, we expect to see the moving average line moving upwards, below the candlesticks.
If the market is in a downtrend, we expect to see the moving average line moving downwards, above the candlesticks.
Therefore, if we have a change of trend, the moving average line will intersect the candlestick – hence the “moving average crossover” which so many traders look to as an indicator of a new trend.
The image above is for a 100-day moving average, and you can see that there’s one genuine crossover signal in this 18-month period, and one false whipsaw.
The longer the timeframe for your moving average, the fewer times the price will retrace to it, but the more significant it is when it does. For example, a 10-period MA will be tested and penetrated very frequently, while a 200-period MA will touch or penetrate far fewer times. Therefore, a violation of a 200-period MA carried much more significance than that of a 10-period MA.
“Slow” moving averages like the 200-day MA are being watched my many, many traders, investors and funds, who will take major long-term investment decisions based on these kind of penetrations. These are serious figures that traders ignore at their peril.
Seeking confirmation
As we’ve just seen on the 100-day MA example above, even long-term moving averages will give false signals. Therefore, set-ups that rely on moving averages will need further confirmation signals.
The simplest way to get confirmation of a moving average signal is to use … another moving average. It’s one of the oldest tricks in the trading book – and it still works well.
Apply two moving averages to your chart (say 20 and 50) and demand that the 20-week MA be above the 50-week MA before taking out a long position; or that the 20-week MA be below the 50-week MA before taking out a short position.
Finding the right timeframe
Many traders will be repeatedly changing the timeframe of their moving averages in search of the Holy-Grail combination that will eradicate false signals and always give them a perfect trend indication.
I’m sorry to tell you, this magic number doesn’t exist.
All trading indicators will give you false signals. The longer the timeframe you choose, the less false signals you’ll get, but also the slower the response time.
The best way to go is to pick three moving average numbers and stick with them – by working with these MAs long-term, you’ll start to understand their nuances – you’ll learn how quickly to react to them – what sort of extra confirmation you require of a trend when they’ve indicated it.
Did you spot this warning sign?
At the end of last year, I wrote about “big picture” indicators called “golden crosses” and “death crosses”. In simplest terms, a golden cross is when the 50-day Moving Average crosses above the 200-day moving average; and a death cross is when the 200-day MA crosses above the 50-day MA.
If you’d like a bit more detail about what these are – you can check out the email on the archive here.
Why have I decided to bring up the subject of death crosses on the Friday before Easter?
Well, I don’t want to put the fear of God into any bulls out there – but, have you seen the potential death cross building up on the FTSE charts?
One to watch …
