From the November 2013 issue of Futures Magazine • Subscribe!

Using moving averages to target the trends

Every market has its time, including stocks. This is the basis of trend trading. At any given time, some stock or market sector is appreciating or declining steadily in price. These trends embody significant profit opportunity for traders, offering relatively large rewards with comparatively little risk with respect to other strategies.

However, the task is not so simple. Traders must not only find the right stocks or market sector exchange-traded funds, but they must execute a disciplined approach to trading them. Many traders miss profit opportunities because of fear.

Fear is a mental anchor that feeds a disbelief that the trend won’t continue. In the mind of the trader, either the stock has risen or fallen too much. It has left no more room for predictable price change. However, most of the time, the trend continues and opportunity is missed. These missed trades usually are when a smaller trend of the larger move breaks. 

Trend trading does not have to be complicated. There are a number of tools available to identify when stocks are making an extended move. One such approach might include the following technical conditions to qualify an uptrend:

  • The stock is above the 21-, 50- and 200-day moving average
  • The stock has started moving up after a long period of consolidation
  • The stock is making new highs on the six-month or 52-week time frame

Consider “Time to move” (below). The Indian stock La Opala RG’s behavior depicted here is illustrative of how individual equities move no matter the market. As we see, it went through a long phase of consolidation from February 2012 to July 2012, with the major moving averages getting squeezed in that period.

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