This is the beginning of what will probably only be a few posts about basic indicators/setups. Everything I chat about in these will be something that I personally use, something that is very simple to use, and something that is historically incredibly reliable. Something to keep in mind with TA is that there's a lot of garbage out there, and often times the more complex someone's TA is the more magical/fake it is. TA is never, ever, ever 100% accurate and wild cards come up that break the mold of even the most reliable setups, so keep that in mind if you decide to trade using these setups; previous results are not guarantees of future performance. Keep this in mind please and always watch out for yourself.
200 Period Hull Moving Average on the One Day Time Scale
When it comes to reading price action, there are few indicators that are as useful as moving averages. The idea behind a moving average isn't to tell you where the price of an underlying has to be it's to help expose a baseline of where the market at large has been pricing an underlying over a set period of time. Moving averages provide us with price support and trend confirmation information by removing the noise of daily volatility and price swings to give a less chaotic view of price action over time.
Of the different types of moving averages, my favorite is the Hull Moving Average (HMA). This is a very fast, smooth moving average that in many cases can eliminate the lag you find in Simple or Weighted Moving Averages. In fact, the HMA is kind of a sped up, bastardized Weighted Moving Average:
HMA= WMA(2*WMA(n/2) − WMA(n)),sqrt(n))
One of the most reliable uses I've found for the HMA is to view underlying price in against the last 200 daily periods of price action. This is way more reliable on large to mega-cap companies but it does work reliable on the more "boomer-y" of the midcaps. In my opinion, the biggest thing that technical traders will have to look for are assets with the least potential for meme-ability and those assets are the best for this strategy IMO.
So How do You Use This?
I very, very, very rarely take bearish positions because for the large part stonks really do only go up for the most part. However, I've had the most success with this indicator as a bearish indicator. For me personally, this isn't an indication for me to take a bearish position necessarily, it's an indicator to deleverage and pull some money off the table until I can see what the next few days holds.
So using SPX futures as an example, when the price of an underlying falls below the 200HMA on the D1 time scale, it is an incredibly reliable indication of either a downturn or a sustained period of volatility in markets. My backtesting on the assets I've used this on has shown it to be roughly 90% reliable over the past 5 years I looked back. That being said, just like with any TA, it's not reliable 100% of the time. You can see a recent (early Feb 2021) example showing an instance where price shot right back up followed by a sustained period of volatility in the markets (Mar 2021).
When this occurs on larger market indexes, I do the following:
When the daily price action falls below the 200HMA on the D1 candle, it's telling you that the underlying has approached a level of weakness that is extreme in comparison to its total performance over the past 200 days, which is no small thing. Generally, the market reacts with fear as prices weaken and sell-offs of varying degrees follow or at least rotations from sectors that increase overall volatility in the markets.
The best TA is simple, it's easy to understand, and it's easy to connect with real-world motivations of how actual people behave and think. The 200HMA is a great example of this in my opinion, and is something grounded in reality that produces actual results instead of being yet another of the waterfall of fantastical garbage people like to throw out as TA.
200 Period Hull Moving Average on the One Day Time Scale
When it comes to reading price action, there are few indicators that are as useful as moving averages. The idea behind a moving average isn't to tell you where the price of an underlying has to be it's to help expose a baseline of where the market at large has been pricing an underlying over a set period of time. Moving averages provide us with price support and trend confirmation information by removing the noise of daily volatility and price swings to give a less chaotic view of price action over time.
Of the different types of moving averages, my favorite is the Hull Moving Average (HMA). This is a very fast, smooth moving average that in many cases can eliminate the lag you find in Simple or Weighted Moving Averages. In fact, the HMA is kind of a sped up, bastardized Weighted Moving Average:
HMA= WMA(2*WMA(n/2) − WMA(n)),sqrt(n))
One of the most reliable uses I've found for the HMA is to view underlying price in against the last 200 daily periods of price action. This is way more reliable on large to mega-cap companies but it does work reliable on the more "boomer-y" of the midcaps. In my opinion, the biggest thing that technical traders will have to look for are assets with the least potential for meme-ability and those assets are the best for this strategy IMO.
So How do You Use This?
I very, very, very rarely take bearish positions because for the large part stonks really do only go up for the most part. However, I've had the most success with this indicator as a bearish indicator. For me personally, this isn't an indication for me to take a bearish position necessarily, it's an indicator to deleverage and pull some money off the table until I can see what the next few days holds.
So using SPX futures as an example, when the price of an underlying falls below the 200HMA on the D1 time scale, it is an incredibly reliable indication of either a downturn or a sustained period of volatility in markets. My backtesting on the assets I've used this on has shown it to be roughly 90% reliable over the past 5 years I looked back. That being said, just like with any TA, it's not reliable 100% of the time. You can see a recent (early Feb 2021) example showing an instance where price shot right back up followed by a sustained period of volatility in the markets (Mar 2021).
When this occurs on larger market indexes, I do the following:
- Wind down on exposure to long, market reactive assets (ie: $AMD for a drop in NQ, etc)
- Open up long volatility plays such as $VIX or inverse ETFs
- Completely close 100% of my shorter dated long options plays (less than 2 months)
When the daily price action falls below the 200HMA on the D1 candle, it's telling you that the underlying has approached a level of weakness that is extreme in comparison to its total performance over the past 200 days, which is no small thing. Generally, the market reacts with fear as prices weaken and sell-offs of varying degrees follow or at least rotations from sectors that increase overall volatility in the markets.
The best TA is simple, it's easy to understand, and it's easy to connect with real-world motivations of how actual people behave and think. The 200HMA is a great example of this in my opinion, and is something grounded in reality that produces actual results instead of being yet another of the waterfall of fantastical garbage people like to throw out as TA.
