Investors have all kinds of tools they use to determine where they think stocks and exchange traded funds (ETFs) are going, and one of the most popular ways of forecasting is looking at price trends. One popular way of doing that is by examining moving averages.
The future is always unknown. Despite the many complex strategies that have been devised by financial experts to forecast the market’s direction, there’s no such thing as a crystal ball.
While you can’t find indications of the future, what you can do is hunt for trends by using moving averages, explains Gary Gordon for ETF Expert.
The most popular moving averages are the 50-day and the 200-day, the latter of which we use. (Why buy-and-hold is dead).
The rules are:
1. When a position moves above its 200-day moving average, it is a buy signal.
2. When a position moves below its 200-day moving average, it is a sell signal.
Using a 200-day moving average strategy allows you to take positions, knowing that you also have a sell point to protect you on the downside. The stop loss will protect you on the downside, while the entry point could have you in at the start of a potentially long-term uptrend.
The most basic principle of trend following is that there is always a bull market somewhere. When a trend peters out, a trend following discipline will be your impetus to sell and look for another position. A common mistake investors make is hanging onto positions too long after their trends have wound down, suffering greater and greater losses while missing uptrends in other areas. (Getting a solid start in the next phase of the market).
You can use our ETF Analyzer to find ETFs that are above or below their trend lines. To sort by funds above their 200-day moving average in ascending order, click on the header that says EMA 200. To see them in descending order, click EMA 200 again. The Analyzer also sorts funds according to where they are in relation to their 50-day moving average, if you prefer a shorter time frame.
More on trend following can be found in The ETF Trend Following Playbook.
For more stories about trend following, visit our trend following category.