AK has been an analyst at long/short equity investment firms, global macro funds, and corporate economics departments. He co-founded Macro Ops and is the host of Fallible.
Last week the Dow Jones Industrial Average closed below the 200 day moving average for the first time since 2016. And of course, everyone panicked thinking this was the start of the bear market. Well in the video above we talk about the RIGHT way to use the 200 DMA and how it can improve your trading strategy.
Normally investors use the 200 DMA as an indicator of how the market is doing. The 200 day moving average is just the average of the prices of the last 200 days on a certain asset. It forms a line on the chart. So if price is above that line, investors look at it as good news, that the market is healthy. But if it drops below that line, then there could be trouble ahead.
Most of the time the 200 DMA acts a support for prices. They come to that level and bounce and then keep heading higher within their trend. But once in a while they will break that line. But when that line breaks, you shouldn’t completely sell out your portfolio all at once. Breaks happen frequently. And if you sell out each and every time, you’re going to suffer from chop. You’ll lose money and your mental capital as well.
Many breaks that happen are just noise. What you really want to use the 200 DMA for is to establish a trend. The slope of the line gives you an idea of how the market doing. If it’s going up and to the right, things are good. If it’s flattening out, then you’re probably seeing some consolidation in the market and need to keep an eye on it. If it’s trending down, then you stay out.
To learn more, make sure you watch the video above!