Two experienced traders, Stuart McPhee and David Jenyns, concentrate on some key areas of the business of trading including using the moving average as a technical stop, and recommended trading books.
Stuart: We’ve seen examples recently where stocks have been completely belted. Individuals have been completely belted one day and have dropped 60, 70 percent, and people have thought what an absolute bargain and then the next day it drops another 25 percent. I think it’s important not to buy things just because they’ve fallen a long way because it might be a long while before they get back up if in fact they return to previous prices.
David: There’s no doubting you can make significant gains if you happen to pick the bottom but it is risky business just to try to bottom pick. And you could try and pick things as they’re going down, but a lot of the time just because it’s cheap doesn’t mean it isn’t going to get any cheaper.
That comes back to the style of trading that Stuart and I do, which is adhering to the rule that the trend is your friend. When in the business of trading, you want to be trading with the trend not against the trend. That is not to say you can’t make money trading against the trend, but I feel you are stacking the odds in your favor if you are going with the trend.
The next question is what moving average do you use to determine a technical stop?
Stuart: I use moving averages solely for my analysis and entry decision but once I am in a trade, for short term trading I use a technical stop which is not moving average based and for my medium term trading, I use volatility based. Let’s call it a trailing exit, because moving averages are quite handy for trailing exits.
For the business of trading, I don’t think there’s a right or wrong number for moving averages. You don’t want to make it a five day moving average because it would be too close for medium term trading. Just apply a few different moving averages on a chart of a typical stock that you would like to be in that trade for, like for a period of time.
What I mean by that is, look at a chart that has done really well over the last three or six months and then try different moving averages to find which one did a good job of allowing the stock to move higher. You’ll probably find something around the 30, 35, 40, 45 day moving average will do quite well.
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