In the “what can you do about it” category, here are a couple ideas to think about.
Let’s look at two very simple trend following ideas.
Most of us are familiar with the 200-day moving average (MA). It is simply a smoothing of the average price of, for example, the S&P 500 Index over the last 200 days. Take all the daily closing prices, add them up and divide by 200. It creates a smooth trend line that enables you to see if the trend is moving up or moving down.
In an uptrending period, the average price is moving higher. In a downtrend, it is moving lower. Investors can use the trend as an indicator as to when to be invested and when to hedge or get out of the market. But one needs to have a rule to trigger a signal. It’s one thing to see the trend line moving higher or lower, but it is another to know when to act.
One of the more popular trading indicators is called the “golden cross.” It is when the 50-day MA price line (the shorter-term trend) crosses above or below the 200-day MA price line (the longer-term price trend). A buy signal when it crosses above. A sell signal when it crosses below.
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