Mean Reversion – Moving Average Magnets

 Mean Reversion The Moving Average Indicator. Part III

In my two previous articles on this topic, I’ve detailed how traders and investors use one of the most common components of technical analysis, the simple moving average.  A moving average is a running average of the closing price of a stock over x number of time periods.  The two most widely used averages are the 50day and 200day moving averages.  As I’ve said, moving averages are not just used by specially trained market technicians.  Today even financial analysts with Harvard MBA’s will refer to the 50day and the 200day moving averages as frequently as they do to P/E ratios and earnings growth rates.

In the previous articles, I talked about how moving averages help us get a good “read” of a stock’s price chart.  We’ve seen how to use moving averages to determine the dominant trend of a stock or index, as well as the ideal points at which to enter or exit that trend.  Today I want to bring my discussion of moving averages to a close by talking about one more way to use moving averages.  This is, in fact, one of the most consistently profitable technical trading strategies I use.  In this strategy we are stressing the idea that certain moving averages – particularly the “big two”, the 50day and 200day averages – act as “magnets” for the price of a stock or index whenever it moves too far away from the averages.

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Tom
Dr. Thomas K. Carr (aka “Dr Stoxx”) is the Founder and CEO of DrStoxx.com which publishes 4 market letters every week, in addition to offering trader education and coaching services. Dr. Carr holds a D.Phil. degree from the University of Oxford and a Masters from Princeton. For 17 years he was a tenured professor to undergraduate students. He currently is a fulltime trader, market analyst, trading systems developer, and trainer of traders. The management company he founded, Kingdom Capital, trades accounts for private clients.

Dr. Carr is author of three bestselling trading books including, Trend Trading for a Living (McGraw-Hill, 2007), which has sold over 50,000 copies, with translations in Chinese, Japanese and Korean. Dr. Carr’s insights into the markets have been published in The Wall Street Journal, US News and World Report, Investors Business Daily, and Technical Analysis of Stocks and Commodities.

Tom

Dr. Thomas K. Carr (aka “Dr Stoxx”) is the Founder and CEO of DrStoxx.com which publishes 4 market letters every week, in addition to offering trader education and coaching services. Dr. Carr holds a D.Phil. degree from the University of Oxford and a Masters from Princeton. For 17 years he was a tenured professor to undergraduate students. He currently is a fulltime trader, market analyst, trading systems developer, and trainer of traders. The management company he founded, Kingdom Capital, trades accounts for private clients. Dr. Carr is author of three bestselling trading books including, Trend Trading for a Living (McGraw-Hill, 2007), which has sold over 50,000 copies, with translations in Chinese, Japanese and Korean. Dr. Carr’s insights into the markets have been published in The Wall Street Journal, US News and World Report, Investors Business Daily, and Technical Analysis of Stocks and Commodities.

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