How to Use the ‘200 Day Moving Average’

The 200 day moving average is a commonly used tool amongst traders and spread bettors. Since we refer to this quite often in our updates we thought we would expand on its uses so that you can also use it in your own spread betting.

Firstly, there are two main different types of moving averages, the simple moving average (SMA) and the exponential moving average (EMA). Opinions vary as to which is the better version as both have their advantages.

Exponential moving averages

The exponential moving average is weighted towards the current prices so tends to move a bit quicker towards the current market price. Whether that is a benefit is debatable. The main benefit of the exponential moving average is that it smoothes out data spikes quicker than a simple moving average. However, that is less of a benefit in today’s age of electronic trading and reliable market data.

Simple moving averages

The simple moving average has its own advantages in that more people use it than the exponential average, especially hedge fund managers and professional traders. In a study of hedge fund managers, the 50 and 200 day simple moving averages were the most commonly used, therefore these are likely to give the best indication of what other traders are looking at over the exponential moving average.

Regular readers will know that at LS Trader we continually do extensive research on the markets and all different types of indicators, so we have of course tested both types of moving averages and all different periods. The results are perhaps surprising in that most moving averages, especially the shorter term averages used by most traders are of limited, if any value.

This is likely because the shorter term averages are too sensitive to price and are not a reliable enough indicator of a change of trend. The longer term averages, such as the 200 day simple moving average, has more of a benefit as the market tends to cross the average much slower, due to its longer term timeframe.

How to stay on the right side of the market trend

So, how can you use the 200 day moving average in your spread betting? Quite simply, it’s an at a glance measure of the longer term price trend in each market. A market with a price above the 200 day moving average is considered to be in an up trend, and markets where the price is below the 200 day moving average is considered to be in a downtrend. Therefore, a spread bettor can use this as a long term trend filter and look to only take long positions when the market is above the 200 day moving average, and look to only take short positions when the market is below the 200 day moving average.

Why would you only want to take trades in the direction of the long term trend? Simply because trades taken in the direction of the long term trend have a greater probability of success and are likely to run longer, giving them a higher profit expectation. Trades taken against the long term trend tend to be short lived, run for shorter duration and have a higher chance of whipsawing the trader out of the market.

Although the 200 day moving average is a simple at a glance indicator of the long term trend, its primary use really is to see what other traders are looking at and to see how the price action reacts when it approaches the average. Whether the moving average provides support or resistance can give clues about the views of market participants and future price moves.

At LS Trader, we use our own proprietary trend indicators, which we have found in testing to be much more reliable than the 200 day moving average, or any other technical indicator for that matter, but the 200 day moving average still has some at a glance value, even if it’s only so you can see what others are looking at and how the markets react.

We hope that has assisted your understanding of this long term trend indicator and will help your spread betting.

Good trading

Phil Seaton

You can sign up for a 30 day trial of the LS Trader System here

‘Risk On’ Versus ‘Risk Off’ in Spread Betting

If you have spent any time involved in financial spread betting over the past year or so you will have invariably come across the terms “Risk-on and Risk-off”. We mention these terms often in our LS Trader updates.

Why have these terms become so popular lately, what do they mean and how can you use this information to improve your spread betting? Since 2007 the global economy has been mostly in meltdown following the credit crisis and the stock market crash in 2008. This was a time of risk-off. In March 2009 the markets bottomed due to government stimulus and we saw a return of risk-on.

Since then the markets have switched between periods of risk-on and risk-off and this has a major impact on the global markets, including stocks, commodities, currencies and bonds, all market sectors that we trade at LS Trader.

When to go long

During risk-on periods, investors and traders are confident in the markets and are piling into markets that they think will help them generate high returns. These trades are generally considered more risky than other more conservative trades.

When the market participants go to risk on, the following markets all tend to rally at the same time:

  • Stock indices, such as the S&P 500 and Nasdaq 100
  • Commodities, such as metals and energies
  • High yielding or commodity based currencies, such as the Australian, Canadian and New Zealand dollars
  • Safer currencies such as the U.S. dollar tend to decline

When to go short

During risk-off periods, the above list can be turned on its head and all the above markets tend to sell-off, leading traders to buy into:

  • The U.S. dollar and to a lesser extent, the Swiss Franc and Japanese Yen
  • Government bonds such as 30 year U.S Treasury Bonds and T-Notes.

These two scenarios of risk-on and risk-off are also effectively linked to inflation and deflation expectations. The top list is generally indicative of inflation and the bottom list is generally indicative of deflation.

Because of the risk-on versus risk-off scenarios, most markets are all moving as one, so during risk-on, all the markets in the top list go up while all the markets in the bottom list decline, and during risk-off the opposite happens. This is easily evidenced by the prevailing market trends.

Using this information, spread bettors have a road map as to where the markets will likely be heading in the near term. The problem with this is that of late the markets have been switching frequently back and forth between the two scenarios.

This is why the trusted rules of trend following, trading with the long term trend, riding winners and cutting losses works, as by trading with the long term trend you are likely going to be on the right side of the risk-on – risk-off trade and overall market moves. You will also be in a position to run up big profits if the markets go on to develop an extended trend, and also cut losses quickly should the scenario change, leaving the bulk of your spread betting capital intact for when the market direction becomes clearer.

The LS Trader System

At LS Trader, our spread betting system automatically includes systematic rules to incorporate the above. If you are interested in finding out more about our proprietary spread betting system, the LS Trader system, please click here for a 30 day trial.

Good trading

Phil Seaton

LS Trader Weekly Update 25th November 2012

In last week’s LS Trader update we wrote about whether the reversal seen on the prior Friday was a pause in the recent weakness or the beginning of a recovery. The price action seen during the past week suggests that it was the beginning of a recovery and a move back to risk-on, a position that may continue further over the coming weeks.

Stocks

The support that we had identified previously at 1340 on the December S&P 500 looks as though it may be the bottom for the immediate future, as the S&P 500 has continued higher for 5 straight trading days. The index is now back up above the 200 day moving average and a move towards the highs of the year over the coming weeks may be on the cards.

Due to the extent of weakness over the past several weeks, the trend is still down for the Nasdaq and we did see continued strength on Monday as expected, which continued throughout the week.

Last week we wrote: “The Dax is still the strongest of the indices and is still very much in a long-term uptrend in spite of short-term weakness.” Strength returned in force for the Dax during the past week as the market rallied some 5%, suggesting that we may see new highs for the year in the not too distant future.

As expected, the Nikkei 225 completed the change of trend to up having taken out key resistance. The Nikkei was not quite as strong as the Dax but still managed to advance 3.68% for the week and the trend is now up. We’re now looking for a continuation higher towards 9700.

Commodities

Commodities benefited from a switch back to risk-on and this was highlighted by sharp moves higher for metals and to a lesser extent, energies.

Gold, as we suggested would happen last week, broke up through resistance at $1740 on Friday and this led to strong buying, including buying from George Soros. The trend for gold has remained up throughout the recent period of general market weakness and we will now likely see a continuation higher to test critical resistance at $1800. This level has held firm several times so stiff resistance can be expected. Should the market be able to clear that level, we would be at new highs for the year and the possibility of a move towards all time highs would come back into focus.

Palladium was the most bullish of the metals, advancing by 6.57% for the week and resuming the long-term uptrend in the process, followed by silver, which also made a strong advance, gaining 5.39% for the week. The trends remain up across the board for metals.

January Light Crude had a mixed week again but did manage to move above the $88 resistance level but still remains in a downtrend. Brent Crude continues to be stronger, and this week advanced by 2.28%. The trend for Brent is up.

Currencies

Recent dollar strength came to an abrupt end as weakness for the dollar cam in almost across the board as risk-on became the strategy of choice one again. This led to some sharp reversals of recent trends against all markets, with the sole exception being against the Yen, which continues to be weaker still. We have written previously about our expectation for a much weaker Yen and that move continues to play out in the markets at present, with the next target at 84.00. Short Yen positions continue to offer excellent spread betting opportunities as the current trend progresses.

Interest rate futures

The interest rate futures markets were all weaker this week but the long term uptrends are still intact. Whether last week’s weakness is the beginnings of a larger move lower remains to be seen. Considerable further selling will be required before a change of trend to down is confirmed.

Good trading

Phil Seaton

You can sign up for a 30 day trial of the LS Trader System by clicking here

Energy Trading – How to Spread bet the Energy Markets

Energy trading is a hot topic at present as people are very focused on energy prices and these markets are among the most popular for commodities trading. Of course it’s a very simple matter to spread bet the energy markets on any spread betting platform.

There are five main energy markets that can be traded. These are:

  • Crude oil (US)
  • Brent crude
  • Heating oil
  • No leaded gasoline
  • Natural gas

Spread betting these markets carries significant benefit over trading these energy markets via futures trading, which is beyond the scope of most due to the large contract sizes and margin requirements. However, most spread betting companies offer the above markets with spread bets of as little as 10p per point, although most are larger at around 50p. The smallest bet sizes per point I have found on these markets are at ETX Capital.

The spreads on these energy markets are generally tighter for the crude oil markets but are wider for the remaining markets. Crude oil generally has a spread of around 4 ticks, but the others are often as wide as 30 ticks.

Energy trading can be quite volatile and most of these markets have quite large average true ranges (ATR), with no leaded gasoline normally the most volatile. Therefore, even at 50p per point using an appropriate stop to take into account the expected volatility can lead to quite a large bet, so this should be taken into account before opening any trades.

Many novice traders make the mistake of opening a trade and then placing a stop loss after they have opened the trade, generally at their pain threshold, rather than taking into account the volatility and chart structure and then selecting a bet size based on these.

The correct approach is to first use a method of identifying where you would be wrong on the trade and placing your stop just beyond that price, or using a volatility based stop, and then dividing your trading capital allocated for the trade into that amount. That will give a suitable bet size per point. Trading some of these energy markets will be beyond the scope of smaller accounts.

Energy trading can be exciting and profitable and although these markets are generally volatile, they do often trend very well over the long run. At LS Trader we have had some very profitable and long running trends from these markets over the years. This includes back in 2008 when we rode Crude prices up to their all time high at $147 and then also profited from their sharp decline where they fell all the way back to $35 by being short.

According to our proprietary trend analysis at LS Trader, the long-term trends for this sector are currently up, with the exception of U.S. Crude, which is still in a downtrend.

Hopefully this has helped you with your understanding of the energy markets and energy trading.

Good trading

Phil Seaton

P.S. Find out more about the LS Trader system by clicking here

LS Trader Weekly Update 18th November 2012

The long-term trends according to the LS Trader proprietary trading rules are now mixed for stocks following continued weakness from the U.S. indices, especially the Nasdaq 100. The trend has continued to shift towards the dollar and commodities are still mixed but currently mostly bearish. The recovery late on Friday for stocks, which recovered some of the recent losses as well as some weakness for the dollar on Friday are about the only things that suggest a possible pause in the move to risk-off and further stock index weakness and dollar strength. The week ahead promises to be interesting and we will see whether the moves late on Friday were just a pause in the larger move or the beginnings of a recovery.

Stocks

We wrote last week that the S&P 500 would likely be heading lower towards 1320 and that still looks to be on as the S&P 500 has added another week of declines to its recent weakness. This week saw the first close below the 200 day moving average since June. There were signs late on Friday that we may see a bit of a dead cat bounce as support was found around 1340. The trend is still up but possibly not for long.

The Nasdaq 100 continued with its very weak performance, and completed a change of long-term trend to down for the first time in quite a while. The Nasdaq is normally the front runner for moves in the U.S. indices and when it is it tends to lead the way. It has been the weakest of U.S. markets during the recent sell-off. Friday did however see quite a strong rejection of lows as a hammer type candle formed on the daily charts. This suggests possibly some more strength on Monday but the trend is now down.

The Dax tested the lows of the prior week as expected and continued lower, reaching a 10-week low in the process. The Dax is still the strongest of the indices and is still very much in a long-term uptrend in spite of short-term weakness.

The Nikkei 225 was by far the best performing index with 2 huge up days, on Thursday and Friday. The trend is still down for the Nikkei but that will change if last week’s bullish price action continues much longer.

Commodities

Gold was unable to clear resistance at $1740 and has drifted lower this week but the trend still remains up. Support will likely be found around the 200 day moving average and the lows of the morning star pattern that formed during the previous week, all around the $1670 level. A break below that level would be considered bearish, but for now the trend is up and a test of $1740 looks more likely. Silver as usual continues to move in a very similar fashion to gold.

Crude has had a mixed week and remains within the range between approximately $84 and $88. The trend is still down. Crude continues to be the weakest of the energy sector, with no leaded gasoline currently the strongest.

Currencies

We have been writing of late about our expectations for an extended move higher for the dollar and that move continues to gain pace as the dollar has advanced almost across the board this week. The long-term trends are now favouring the dollar against most of the majors.

The largest move was seen in the dollar/yen, which soared higher this week on expectation of further weakening from the Bank of Japan. This move easily took out recent resistance as the long-term uptrend resumed. We may now see a continuation towards 8400 further out.

Interest rate futures

The interest rate futures continue to advance, keeping the long-term uptrend intact. The 30-year T-bond may yet continue higher to test all time highs around 15450. The 5 & 10 year T-Notes have also continued higher but the upside appears limited for both of these two markets. The long-term trend is still very much up across the sector.

Good trading

Phil Seaton

P.S. You can sign up for the LS Trader financial spread betting system here

LS Trader Weekly Update 11th November 2012

As expected, Obama won the U.S. Presidential election and is now in place for a second term. Opinions are divided as to whether that is a good thing or not. One thing we can say is that the markets were not particularly bullish on the outcome, although much of that is likely due to the focus now shifting towards the fiscal cliff, something which we will probably be hearing all too much about between now and the 1st January 2013.

The long-term trends are still up for stocks, but possibly not for long, mixed for the dollar and commodities. The past week has seen a shift towards risk-off as stocks have continued to sell off, and money has flowed in to the dollar and Yen.

Stocks

We have been writing about the 1380 level and 200 day moving average as a likely target for the S&P 500, and both were hit this week. As we also wrote last week, if these 2 levels could be taken out that we would likely see a continuation lower towards 1320, so that will be the next focus.

The Nasdaq 100 crashed through the 200 day moving average and the 2600 support level and will change trend to down for the first time in a long time soon if the current weakness continues.

The long-term trendline on the Dax that we have been writing about for the last couple of weeks was finally taken out this week, and decisively so. Friday did see a bit of a recovery with a hammer type candle on the daily charts (not quite a hammer as the lower shadow is not quite twice the length of the body) but this does show some buying returning to the market at just north of 7000. Whether that continues and is a support area remains to be confirmed. It’s likely that the lows of last week will be tested again soon.

Commodities

For the past couple of weeks we’ve been expecting gold to fall to the 200-day MA around $1670 and that happened this week. Gold fell to exactly the 200 day MA and that was the bottom of the short-term downtrend and also formed the low of a 3 day morning star bullish reversal pattern. From there gold has continued higher and may now target the $1750 area. The long-term trend remains up.

The $84 support level is still holding for December Crude but the trend remains down. Should support continue to hold there should be resistance at $88. $84 down and $88 up remain the levels to focus on for short-term direction.

Currencies

Last week we wrote “We may be seeing the very early stages of strength for the US dollar.” As the stock market has continued with weakness, a continuing shift towards risk-off is underway and that means money flows towards the dollar and the Yen.

The dollar index has continued higher and now looks set to test the 200 day moving average but for now the trend is still down. Continued weakness in the Euro will assist the rise of the dollar index.

The biggest market in the basket of currencies that make up the dollar index is the Euro, and as we have covered recently here the Euro has been building up for potentially a large move should it be able to break out of the recent range and take out support, a break of which would confirm that a double top was in place. Following the break of that support and confirmation of the double top, we now have a new downside target of $1.25 on the December contract.

The resistance levels that we mentioned in last week’s update held firm for both the Pound and the Dollar against Japanese Yen. This and the move towards risk-off led to the Yen strengthening and has brought the recent Yen weakness to an end for now.

Interest rate futures

The interest rate futures markets have all risen today, leaving the long-term uptrend intact. The 30-year T-bond finally broke out of the range and may now continue higher to test all time highs around 15450. Once again those calling for a top in these markets and selling short prematurely have come up wanting again.

Good trading

Phil Seaton

www.LSTrader.co.uk

LS Trader Weekly Update – 4th November 2012

The U.S. Presidential election is just a couple of days away and it looks as though Obama will remain for a second term, although the fight has become a lot closer over the past couple of weeks than expected. Speculation mounts over what the impact on the markets will be depending on the outcome but as we wrote last week, forget guessing and predictions and let the markets tell you where the markets want to go, simply by following the trends.

Stocks

The S&P 500 has had a mixed week but is still holding above our support target of 1380. If 1380 does get tested and gives way, the next likely target would be the 200 day moving average, which currently sits at 1366. If that were also to fail there is a considerable amount of chart space under that level so we could see a move to 1320 further out. However, for now the trend is still up. Whether we have seen the high for the year in this market is a question that remains to be answered, but it is looking increasingly likely.

The Nasdaq 100 has also had a mixed week as it continues to trade around the 200 day moving average. Support is currently in a zone between the 200 day MA and the 2600 level.

The long-term trendline that we wrote about last week has continued to support the Dax, which is the strongest of all the indices that we trade at LS Trader. Whether there is enough strength in this market to test the highs of the year remains to be seen, especially if the other global indices remain weak.

Commodities

Last week we wrote: “The 200-day MA looks like the likely next downside target around $1670”. Friday saw a huge sell-off in Gold as the market shed $42 for the day, taking the market down to $1675, and just above the 200 day moving average. The trend for now is still up but there is undoubtedly weakness in the short-term. Silver also had a weak day on Friday but as with gold, the long-term trend is still up.

Support at the prior week’s lows are still just about holding for Crude but they may be broken early this week to pave the way for a move lower towards $80.

Other commodity markets have been showing signs of weakness as well, with weakness in all markets in the softs section and potential weakness building up in the grains markets. Very few commodities are on the rise at the moment.

Currencies

We may be seeing the very early stages of strength for the US dollar. The dollar index has reached new 2 month highs and may be set to move higher. The biggest market in the basket of currencies that make up the dollar index is the Euro, and as we have covered recently here the Euro is now at a critical juncture. This critical juncture is support at $1.28, which also marks the intervening low, that if broken, would confirm a double top. A break through this potentially critical support level would confirm the double top and give a new downside target of $1.25 on the December contract.

The Japanese Yen has displayed further weakness over the past week against both the Pound and the dollar. Both markets are at resistance levels which if taken out could open the way for extended moves higher.

Interest rate futures

The interest rate futures markets have ended marginally higher and still all remain in a long-term uptrend.

The 30-year T-bond is still in a range between approximately 150 and 146, a range that has held for the past few weeks. If 150 can be taken out then the uptrend may well resume, but a breach of 146 support, which of late has been well supported, would suggest a further decline towards major support.

Good trading

Phil Seaton

www.LSTrader.co.uk