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

Do Spread Betting Strategies Really Minimise Losses

Spread betting is a risky type of financial investing and one in which great losses may occur. However, utilising proven spread betting strategies can help minimise losses. There are many spread betting strategies which really can help investors earn more profits than potentially suffer losses.

Spread betting strategies are many and vary with the financial instrument being traded. One strategy which is possible on almost all trades is the execution of a stop loss. A stop loss outlines a total loss a trader is willing to lose on a particular trade and when that loss has been reached, the trade automatically closes.

A guaranteed stop loss is another of many spread betting strategies which helps minimise losses and works in the same way as a stop loss. The major difference is the stop loss takes some time to close out the bet and therefore a small amount of additional capital may be lost. There is no waiting time with the guaranteed stop loss and so the loss limit is guaranteed.

Other spread betting strategies include outlining the trades planned for each day and adhering to this plan. Spread betting strategies can prove beneficial to minimising one’s losses which can help all traders but especially novice traders.