Learn how to properly use the 200-day moving average using these three practical and straightforward rules for success.
Now is an excellent time to set up a basic stock chart to allow you to view the long-term direction of the stock market and create a trading rule.
This example will help you understand where the market is and what the likely direction is going to be and how to replicate the same setup for today.
Stock Chart Setup
- Select a weekly stock chart; 5 days per bar
- Select your favorite index; S&P500 or Nasdaq 100
- Add a Simple Moving Average (SMA) Indicator
- Set the Moving Average Indicator to 40; the reason we do this is if the chart is weekly, meaning 5 days per bar the 40 bar moving average is equal to the 200-day moving average.
- We can refer to this as the Moving Average 40 on a weekly chart.
The 200 Day Moving Average Is The Most Predictive Indicator of All.
3 Simple rules for the 200 Day Moving Average
Use these rules to enable you to understand the 40 Bar Moving Average.
- When the price on the chart is above the 40 bar moving average, the index is in an up-trend (see the green boxes below)
- When the price is fluctuating on or around the moving average, it is in a sideways consolidation.
- When the price is clearly below the 40 bar moving average the index is of course in a down-trend (see the red boxes)
So what is the rule to use to interpret this chart?
Ask yourself this question. On a weekly chart, do you really what to be investing long (expecting price rises) when the price is below the 40 bar moving average (the RED BOXES)
Stock Market Investing (BONUS) Rule For Medium / Longer Term Traders
When the Price Pattern of the Index breaks down through the 40 bar moving average = Bearish = Sell = Go Short.
When the Price Patter of the Index breaks out above the 40 bar moving average = Bullish = Buy = Go Long.