
While there have been many
attempts to use the movement of price on a chart to predict the direction it
will go in the future, most of these suffer from the reality that they are, at
best, lagging indicators. A chart stuffed with MACD, Stochastics, Relative
Strength Indexes (RSI), Ichimoku Clouds, Bollinger Bands and others is nothing
other than a chart that has too much going on – an overcomplicated distraction.
There are one or two
indicators that are both uncomplicated and apparently effective, on a
statistical basis, although we are convinced that this is not from any inherent
ability to predict, but rather because they are closely watched by a large
number of traders and so become what might be termed self-fulfilling prophecies.
For this to work they must be both simple and objective. They must be capable
of easy calculation and, within reason, must be derived from the same data that
is available to everyone else.
The 200 period Simple Moving
Average (SMA) falls into this category, especially when viewed on the daily
chart. So does the idea that higher highs and higher lows constitute an ongoing
rising trend, and the opposite situation, lower highs and lower lows, indicate
a falling trend. Variations on this theme, such as a series of higher lows even
in the absence of higher highs, could also have significance.
The chart above illustrates
all of these principles. It belongs to gold priced in US dollars, and the
period is mid-2012.
As can be seen, there was
upward pressure on the price of gold during the period leading up to August 10th.
An observant trader would have been aware of the higher lows that illustrated
this. However, when the 200 day SMA was breached, this trader would have sat
bolt upright and would have been very aware of what might happen next. The
return to the 200 SMA would have been the signal to enter the market on the
long side. If the analysis turned out to be wrong, that trader, who is also a
prudent one and who always thinks in probabilities, would have been able to
rely on his or her money management techniques to ensure that any loss would
have been nothing more or less than the cost of doing business.
Thanks for this great analysis learn lot.
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