Trading Around the 200-Day MA
As you have seen on a historical basis, there have been better edges shorting ETFs under the 200-day and going long ETFs above the 200-day. There’s ample statistical evidence that confirms this.
When ETFs and stocks begin trading near the 200-day, the returns have historically been more chaotic. The % correct and the average gain per trade doesn’t change by a great amount. What does change is the “volatility of the returns.”
What this means is that the gains and losses tend to be greater during this period of time. Why? Because so many fund managers, along with hedge funds and professional traders key on this level. This often causes exaggerated moves (on both sides) which you often don’t see in other time frames.
Taking this information into account, the rule is that you can lower your position size near the 200-day moving average, or instead of trading the outright stocks and ETF’s, use their options. Then when the market begins pulling away from the 200-day in either direction, go back to your normal position size and strategies.
This is especially true now, as many stocks and ETFs have moved just crossed or are now closing in on their 200-day moving averages.
This is from Larry Connors Daily Battle Plan which he publishes each morning. If you’d like to take a free trial click here, or call 1-888-484-8220 ext 1 to start your free trial today.
Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.