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Thursday, 21 January 2010

Don't Forget 200 EMA

Newton’s First Law

Every body continues in a state of uniform motion in a straight line, unless it is compelled to change that state by a force impressed upon it.

You may remember this law as “an object in motion, stays in motion.” This means that once the stock price starts to move in one direction, it’s very likely to continue to trend in that direction until something changes the overall bias of the stock movement.

Simple EMA for my Lizard brain

The 200 EMA could be considered the most important trend indicator. Why? Because the stock price is either moving toward it or away from it. It’s a Yin/Yang or love/hate relationship. Therefore, if the stock price is held by the 45 EMA, the stock price will likely continue to move away from the 200 EMA.
 
When the stock price arrives at the 200 EMA and breaks down; it means the bears have finally over run all the bulls.
 
If 45 EMA crosses below 200 EMA, the bears celebrate their victory.
  

But not all bulls are dead as some bulls are busy producing more bull calves.


200 EMA is known to be used by many long term investors looking to exit or reduce their long term holding in a stock.

So the general rule is that if the stock price is above the 200 EMA then you should look for buying opportunities until it falls below this indicator, at which point you should seriously consider selling some or all your stock.

But, of course you may look for oversold positions when the stock price is substantially below the 200 EMA; but you will never know when the stock price is at or near the bottom and may substantially fall further to trigger a falling knife effect.

2 comments:

  1. Hi Createwealth8888,

    Interesting article.

    Would u like to exchange blog links?

    ReplyDelete
  2. HI, take note when using Moving Average:

    The advantages of using moving averages need to be weighed against the disadvantages. Moving averages are trend following, or lagging, indicators that will always be a step behind. This is not necessarily a bad thing though. After all, the trend is your friend and it is best to trade in the direction of the trend. Moving averages insure that a trader is in line with the current trend. Even though the trend is your friend, securities spend a great deal of time in trading ranges, which render moving averages ineffective. Once in a trend, moving averages will keep you in, but also give late signals. Don't expect to sell at the top and buy at the bottom using moving averages. As with most technical analysis tools, moving averages should not be used on their own, but in conjunction with other complementary tools. Chartists can use moving averages to define the overall trend and then use RSI to define overbought or oversold levels.

    Somehow, nothing seems to be working all the time.

    ReplyDelete

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