SURELY someone who fears a death cross must be a 16th-century pirate or gothic enthusiast, not a slick City trader or market analyst? But as it turns out, they are. Death crosses occur when a stock or an index’s 50-day moving average drops below its 200-day moving average – unsurprisingly, this spells trouble. Whereas a golden cross signals the opposite with an upward move of the 50 across the 200-day moving average. These signs are important to learn about if you are spread betting. To give you a head start, here are three things traders should know about moving averages.
1. TYPES AND TIME FRAME
There are many kinds of moving average, so don’t be overwhelmed. No one is better than another. Yet traders seem to favour the standard and exponential moving averages. Obviously enough, the standard is a simple moving average calculation, whereas an exponential one reduces the time lag by applying more weight to recent prices. Spread betting providers’ platforms can calculate these for you. Experts advise that you pay attention to the timeframe you are using if you want to make the most of charting. Angus Campbell of Capital Spreads explains: “If you’re in for a few hours look at 5- to 10-day averages, whereas if you are in for longer, look at the 200-day moving average.”
Those dramatic golden and death crosses can be useful signals. They – like most chart patterns – are not always a reliable indicator. The last one on the FTSE in June this year was a damp squib, but as David Jones of IG Index points out there was one on 3 December 2007 just before the effects of the credit crunch took hold. When you consider that there are so few (maybe one or two a year) it is worth looking out for them.
3. FUNDAMENTALS VS CHARTING
The fundamentals vs. technical analysis debate rages among analysts. Campbell however believes that technical analysis is imperative if you are only in for the short term and suggests that using charts can take some of the emotional attachment out of a trader’s position. While stocks require consideration of the fundamentals, using a combination of methods will serve you well.