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.
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