Using the Moving Average When Investing In ETFs

Some investors want to use exchange traded funds (ETFs) to exploit short-term movements in the markets.

Loren Fleckenstein for Trading Markets gives a primer on using 10-day and 30-day moving averages and the crossovers as a signal of a trend change.

The crossover occurs when a shorter moving average (the 10 day, in this case) traverses the longer moving average. But Fleckenstein says this information shouldn’t be considered alone. Instead, consider price breakouts and volume as confirmation of a trend shift.

One example can be seen in the chart above: while the 10-day line is well above the 30-day, volume fell – an indication that the market wasn’t convinced that there was an uptrend.

This strategy differs from how we manage money. We let each sector, asset class and global region identify its own trend and when something crosses above its 200-day moving average, we consider that the time to buy.

With regard to volatility, there’s nothing magical about the 200-day moving average. If the markets are rocking and rolling, you can consider the 50-day moving average. Bear in mind that it will be more sensitive to movements and it could mean you’ll be trading more.

Some might find a 10- or 30-day moving average is a bit too short-term for their tastes. It would require much more discipline, and for the average investor, it wouldn’t work.