The 200-day Moving Average and the Most Important Rule in Swing Trading
If you are trading stocks, exchange-traded funds, options or e-mini index futures, then we don’t have to tell you how challenging this market has been for a year now. We have had our share of wins and losses in trading, as well.
But the fact of the matter is that we have had more wins than losses during these volatile times. In spite of the volatility – or maybe even because of it – we are making money trading stocks, options and exchange-traded funds in the short term.
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There are a lot of factors that are making this possible. We use Short Term PowerRatings to focus on the stocks that are statistically most likely to rally in the short-term. (Click here to learn more about our Short Term PowerRatings.) We have a technical indicator that helps us quantify fear and greed in the marketplace, allowing us to buy panic and sell complacency over and over again. (Click here to learn about the best technical indicator for short term traders.)
But perhaps more important than any of those very important factors, we have one rule that we never violate. And this rule guides every single stock or exchange-traded fund we analyze. This rule provides the winning context for every single trade we make.
We never buy stocks below the 200-day moving average. Ever.
Avoiding stocks and exchange-traded funds that are trading below the 200-day moving average is one of the most consistent conclusions from more than a decade of model-driven testing of millions of stocks. You can read about that research that here.
And if a picture is worth a thousand words, consider what these charts of stocks trading below their 200-day moving averages have to say:
Do a scan of stocks trading below their 200-day moving average sometime. Go through those stocks one-by-one. It isn’t pretty. Those stock charts will look like scenes from war zones or refugee camps, the city of New Orleans after Hurricane Katrina. These are not the stocks you want to bet on. These are the stocks that will disappoint you, that will fall short of expectations, that will let you down time and time again.
The point isn’t whether or not it happened to you in your trading. It has happened to a lot of traders. The point is to make sure it never happens again.
Successful trading is about having an edge and applying it consistently without fail. Avoiding stocks and exchange-traded funds that are trading below the 200-day moving average is, in our opinion, the first and most important edge that every short-term swing trader should have.
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