The Power of the 200ma
From the Trading Desk of Oliver L. Velez
Those who have followed my work for even a cursory period of time know that I am not a big fan of using a ton of indicators to analyze stocks. Money Flow, RSI, Stochastics, Momentum, On-Balance Volume, MACD, Bollinger Bands, Gan Lines, Fan Lines and the like, while not entirely useless, really do more to confuse traders in my opinion, rather than help. Some traders look at so many indicators that they can no longer see the underlying stock they are analyzing. How productive is that? Their computer screen looks more like a picture of spaghetti and meatballs than a clear picture of price action. Whenever I see that, I know I'm in the presence of a trader who is in search of some magic formula that does not exist. I call them Holy Grail Traders, and they all consistently lose money but they're usually very good at explaining away their many losses by moving the blame from themselves onto one or more of their silly little squiggly lines. This is sad but good at the same time. After all, don't we need others willing to take the other side of our trades? So the more the merrier, I say. Let them keep clouding their screens up.
Price is the REAL Thing!
Let's forget about those who are lost for now. Let's talk amount ourselves for a moment. It has always been my contention that price and perhaps volume are all a trader needs to read and play the market effectively today. And even volume, which is far less important than it used to be, is an overrated item in today's vast world of trading. After all, isn't it price and price alone that ultimately dictates your wins, losses and most indicator movements? Yes. So if price movements even dictate what other indicators do, why not cut to the chase and focus directly on price? Why leave the source? Why turn your attention away from the very thing that causes all the other things (indicators) to move? For everything else is nothing more than a derivative of what is real. And what is real is price. Period! My traders are taught that price and price alone is the dictator of their actions, not some man made squiggly line created by an academic in search of perfection, which as we all know, does not exist in the market. The real thing is always price. Remember that.
The Exception
But get this. Moving averages are the exception. These special indicators are not to be grouped with the rest. They help a trader visually remove the noise inherent in many price charts. They clearly identify the trend for us. They help us spot key entry and exit points and help us ride our winning plays for all they're worth. These are just a few of the many benefits derived from the use of key moving averages. Their power and use is simply undeniable as far as I'm concerned, and they should be a permanent part of every trader's analytical process. Price, Volume and several key moving averages. That's all you ever need. Simple. Pure. Sweet.
A Modern Day Fallacy
Now, I am aware that there are some so-called experts of late who claim that moving averages don't mean anything. They believe that price support and resistance based on prior highs and lows and former areas of price congestion have an exclusive hold on what dictates price reactions, not moving averages. Well, I don't entirely agree. Yes, I'll admit that all the above can and often does cause some form of price reaction. I teach my traders to use all these to look for predictable reactions. For instance, a stock that has rallied back to a former high (peak) from which a sharp pullback ensued will often serve as an area of price resistance, for sure. But so will an over head flat 200 period moving average without the prior high, or a declining 20 period moving average without former congestion. What's more, these so-called experts miss the most significant point of all. They either have forgotten or failed to understand that moving averages ARE prices in an of themselves. They represent the "average" price of the stock over a period of time and therefore ARE representing former areas of support, resistance and congestion. What is a flat 200 period moving average (200ma) other then a visual that represents a former area of price congestion? They are identical, but the moving average has the added benefit of visually keeping the relevance of former price congestion in front of the trader at the current moment.
The 200ma is King!
If all this sounds confusing to you, don't worry. I'll make the use of moving averages quite simple for you in subsequent posts. This post will be dedicated to the almighty, the all-powerful 200 period moving average. It's significance, its reliability, it's sheer, unadulterated power makes this single item an absolute must to incorporate into your trading plan. In fact, the 200ma is so meaningful, in all time-frames, that an astute trader can make his/her entire living exclusively from its use.
What to learn how? Then stay tuned and be on the lookout for the upcoming podcast that will soon accompany this post. Make sure you subscribe to the left so that you won't miss when each new post is added.
Happy Trading!
sigo sus comentarios con mucha atencion.no me pierdo la leccion de la semana . Quisiera subscribirme a un chat me gustaria que incorporaran un moderador en español. Muchas gracias
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Translation:
"I follow your comments with much attention. I never miss the lesson of the week. I would like to subscribe to a chat so please incorporate a Spanish Moderator."
Thanks so much for your support and your kind words. While we have no current plans to add a Spanish chat to our suite of services, it may be something we consider in the future.
I assume you handle English quite well though.
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I liked a lot this lesson. I use the 200 ma as a reference guide in the way pristine teaches it. So , I will observe more closely this ma to take more action in compelling manner. Thanks Oliver
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Alejandro:
I'm glad you found this lesson helpful. The 200ma is by far the most watched moving so its use is almost mandatory. I've been using it for nearly 20 years and its effectiveness is just as sound today as it was in 1987. When I founded Pristine, my first company, in September of 1994, I made sure that I made my audience well aware that the 200ma was to be used in all time frames.
I'm very glad to know that the current instructors at Pristine are staying true to my original teachings.
Happy Trading!
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thanks Oliver. I trade FOREX using your methods and i see the 200ma in all timeframes always act as support or resistance. Maybe in the near future i go to VCM for trading stocks
Thanks
Alejandro
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Alejandro:
You are welcome at any time. Trading a multitude of vehicles diversifies one's market activity, which is a good thing. Sometimes it's the stock market that offers traders the best risk versus reward because of certain dynamics and at other times the best opportunities may be in FOREX, futures, or options. The true modern day professional trader will take advantage of all. When you are ready for stocks, I hope you'll make your home at VCM. Happy trading!
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HI Oliver: I wonder whether you can comment specific setups concerning the 200 MA for instance whether you sell or you buy when the price hits the 200 ma you automatically sell or short?
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No. Blindly buying or selling at the first sign of contact with major moving average like the 200 is nothing more than guessing. That's not trading. We need specific events to occur at these key locations, events that reveal the fact that a shift in the balance of power between the bulls and bears has occurred. It's these very events that I teach over a two day period in our 2-day Trade for Life Seminar.
One needs to know the proper events, how to identify them and exploit them for profitability. But more than that, one must also know the locations at which these events truly become powerful opportunities to profit. Combine the right event at the right location, backed by the right trade management and you're truly operating as a professional.
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Wow! I couldn't agree with you more. I have seen so many new traders with paralysis analysis that are left confused with too many indicators then forget to even look at the big picture like major moving averages or the VIX. I like how you teach! Mary O'Neil
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Mary:
Thanks for the kind words. And yes, you are right. Far too many traders are making this game we call trading more complex than it has to be. While trading is not "easy" it is "simple." Stocks and other tradeable items go up, down and sometimes sideways. That's it. Trading is all about catching the transitions between each and riding the two major moves which are the up and down moves. Easy? No. Simple? Yes. Stay tuned.
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My understading of an buy picture of power is stock above the 20, rising 20 and the 20 above the 200. I do not fully understand the use of multiple time frames. For example, the daily and the 15 might be showing a POP but to enter in the 2 minute when it shows a reversal sign most likely is not showing a POP. Please give us your thoughts on this particular example and on how to best use multiple time frames.
PS - Loved the 7 day. I think all of us VCM traders are actually Oliver's Turtles. I expect we will make you proud.
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Jay:
What I call the "picture of power" or "POP" for short is one of the concepts at the very core of my entire method of trading. What you describe is correct but is so for only one version of the POP. What some have not realized is that there are three different degrees of power or POP, as we like to call it. Let me expound on this a bit more.
The Three Degrees of Bullish Power (+POP1, +POP2, +POP3)
1) First there is your fundamental or regular degree of power which we refer to as simply Bull Power . It is defined by the following formula: A Rising Stock (stk) above a Rising 20 period moving average (r20ma). The exact formula in written form is as follows: Stk > r20ma. Let's look at this first degree of bull power as (+POP1)
2) Second on the list and a bit more bullish is what I have termed Super Bull Power . It is defined by the following formula: A Rising Stock above a Rising 20ma; A Rising 20ma above the 200ma. The exact formula in written form is as follows: (Stk > r20ma) > 200ma. In this 2nd degree of power, there is less overhead resistance and/or supply, making for a bit more bullishness than the former version. Let's state this as (+POP2)
3) Last and far more bullish than the above two versions is what I call Ultimate Bull Power . It is defined by the following formula: A Rising Stock above a Rising 8ma; A Rising 8ma above a rising 20ma. The exact formula for this most powerful picture is (Stk > r8ma) > r20ma. In this ultimate degree of power, the upside momentum in the stock is so powerful that even sloppy attempts to jump on board are often quickly rewarded. This 3rd level of bullishness is written as (+POP3).
The Three Degrees of Bearish Power
Of course, it is important to note that the same is true in reverse. -POP1, -POP2 and -POP3 are simply the converse of the above formulas and scenarios. Study these. Become acquainted with them all and trading profitably more consistently on both the long and short side will become your reality.
Reconciling Multiple Time Frames
As for multiple time frames, if reconciling them is proving to be challenging, don't try for now. That's right. You read me correctly. Simply look for the picture of power on any one of the three trading time frames and when you find it, ignore what any other time frame is saying...for the time being. Believe it or not, you'll still be o.k. Not ideal, but o.k. Over time you will grow in your ability to use other time frames to see deeper (going down in time) or broader (going up in time). This zooming in for more detail and zooming out to see a bigger picture is important but it's secondary in the end. One can simply be o.k. staying focused on the one time frame that has presented the opportunity.
And yes, you all are my little baby Turtles and some of you will grow to big bigger than life itself as traders, which will surely make me very proud. Stay the course and know that I'm here for you, always.
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From the course, I took away the single most important thing was dance with the 20MA. Buy on VBS on a rising 20 (+POP1) or Buy on climatic if the stoks price is drastically below the 20. Either way, don't fight the 20. This has change my whole way of looking at charts. Do you agee with this?
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Dear Jay:
Looks like you picked up two of the eight major themes taught in the 2-day Trade for Life seminar. And they are powerful ones. In fact, many traders find what you mention enough to earn their entire livelihood in the market.
Keep up the study and practice. And stay tuned!
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3.5.8 times...eventually it sinks in. This is so wonderful, that at every turn one can go back and review key points! Thanks!
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Awesome, my friend. Yes, I strongly encourage that each of my students retake the education as many times as is possible. Experts tell us that we retain only about 60% of what we are exposed to the first time. The second time we jump that retention rate to above 80%. And the third time we go north of 90%. So, the goal is to at least take the VCM teachings three times.
This is largely why I offer free retakes of my education for LIFE. As long as my students/traders want to learn, my doors and my arms are open...forever. No extra charges, fees or costs. No nonsense like the crap you hear from other firms like "And now that you having completed the first step you need the super, dooper, extra advanced program which costs triple...." Yuk! What a crime!
What's more, each VCM seminar, class, live trading session is different in some way, so the more exposure to individual sessions, the more varied the experiences, which will only lead to higher levels of learning.
So stay close and repeat, Repeat, REPEAT! It's on me
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Thank you for the free eternal retakes of your Trade For Life education. This is the first time I am so proud retaking lessons - contrary to when I was in school of my earlier years. You're the only kind in this trading education business that will continue guiding and helping students beyond the classroom and into the real world of trading. Forever I will be grateful to you, O Sensei! Stay healthy for we will need you still for the next 100+ years.
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