by Sam Seiden, Online Trading Academy

Online Trading Academy Article of the Week

The Moving Average… It is a tool that is talked about in almost every trading book that has ever been written. Every day, those on TV, CNBCBloomberg and others are telling us where the S&P and other key markets are in relation to the 200 day moving average, for example.

Every charting package on the planet comes with every possible configuration of a moving average for you to use. Because of all this, moving averages must be one of the most important tools for traders and investors, right? You start to think that it must be impossible to make money in the markets without using moving averages. When we take a deeper look into the purpose and result of using moving averages, you start to see that not only do you not need to use them but, more importantly, they can actually hurt you if you don’t understand the risk that comes from using them as a primary buy and sell decision making tool and that is the focus of this piece.

Instead of going through many old charts to find the perfect picture to use as an example to illustrate my logic, I like to use real trading examples from our live trading rooms or one of our other services. We identified many levels on our Supply and Demand grid from November 3rd below, but for this piece let’s focus on one supply level from the grid. This was a supply level in Soybean Futures (black box). Once price rallied the plan was to sell it when it reached our supply level with a protective buy stop just above the level to manage the risk and have our profit targets below.

OTA Supply/Demand Grid – Nov. 3, 2015: The Setup

Price rallied to the supply level where our students are instructed to sell shortly after the market got going. Price moved lower after reaching the level and the trade worked out very well for our grid members who took the trading opportunity. They followed the rules and executed our rule based market timing strategy.

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