Tradefair Weekly Update / Editor / 10 September 2008 / Leave a comment

Buzzwords of the week tip #10

Some traders like to put moving averages on to their charts. Moving averages can help the trader see the wood from the trees, bringing into focus the broad trend of prices and cutting out the distraction of all the usual fluctuations around the trend. There are two main types of moving average, simple and exponential. Exponential ones apply a greater weighting to more recent prices, and therefore reflect changes in direction more quickly, but many traders prefer to stick with simple ones.

Technical Tip of the week

You can put moving averages on to your charts on the Tradefair Spreads platform. Click on Settings, tick the MA box, and select which three moving averages you want on your chart by typing in the length of each moving average in the appropriate boxes. The default is for simple moving averages, you can tick a box if you want exponential ones. Then close the Settings box, and your selected moving averages will be on the chart, together with a legend.

Mixed messages from moving averages on the FTSE100 chart

Many combinations of moving averages are popular. For stocks and indices the 200 day moving average has for decades been used by financial institutions to look at the long term trend. The 50 day is popular for looking at the intermediate term trend, and the 20 day for the short term trend.

A common way to interpret moving averages is to look at their slope, and whether price is above or below them.

There are mixed messages currently if you look at the daily chart of the FTSE 100 extracted from the Tradefair Spreads platform. The 200 day moving average is sloping down, and price is below it, indicating that at the moment the long term trend is still down. The 50 day average is sloping down, but beginning to flatten out, and price has risen above it, suggesting that the bulls are beginning to get the upper hand in the intermediate term. The 20 day average is sloping up, and price is above it, showing clearly that in the short term the bulls have been in the ascendancy.

By close of play in the week ending 13th June a moving average trader would have been able to see that the 200, 50 and 20 day moving averages were all pointing down, and price was below all three of them. The following Tuesday there was a brief spike up in price, providing a good opportunity to go short at 5900, with a stop say 100 points away at 6000. One month later the index had fallen to below 5100. One possible trigger to exit this trade was when price crossed back and closed above the 20 day moving average line, on 23 July. If you had bet £1 per point on this trade, and exited at that point, at 5450, you could have made £450 profit versus a risk of £100.

Happy trading!

The Tradefair Spreads Team