There’s a well known saying that the trend is your friend. And this saying is very true. The market behaves better above its 200-day moving average than below it. And the average gain of the market is far greater when prices have been above the 200-day moving average than when it has been below it.
This rule is not fool-proof. Many good value stocks represent real value below the 200-day ma. But as a whole, without adding any other filters, it’s easier to make money when buying the market and stocks when the trend is up, not down.
One of the best pieces we ever published on the 200-day moving average was Larry Connors’ article “Why Every Trader Needs to Watch the 200-Day Moving Average”. Click here to read Larry’s explanation of the research that quantifies why the 200-day moving average is such an important tool for short term stock traders.
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For Rule #4: Only Short Stocks Below Their 200-Day MA!, click here.
David Penn is Editor in Chief at TradingMarkets.com.