Using 200 Simple Moving Averages To Identify Trade Setups

Using 200 Simple Moving Averages To Identify Trade Setups
Using 200 Simple Moving Averages To Identify Trade Setups
Using 200 Simple Moving Averages To Identify Trade Setups Getty Images

The 200 Simple Moving Average (SMA) is an indicator that is commonly used  by traders to identify longer-term trends in the markets. If the 200 SMA is plotted on daily charts, it is measuring the past 40 weeks of trading activity. If a market is trading above the 200 SMA, it is considered to be in an uptrend. If it travels below the 50 SMA, then it is in a downtrend.

The 200 SMA can also act as a key area of support or resistance. If the market is above the 200 SMA but moving downward, then the 200 SMA can act as a strong level of support. Conversely, if the market is below the
200 SMA and traveling upward, then it can act as  a strong level of resistance.

On Thursday, January 14, the emini S&P 500 Futures market was traveling sideways through the Opening Bell, and below the 200 SMA on the 15-minute charts and higher time frames, signifying that the futures were on a downtrend. No big surprise there – the markets have been plummeting since the New Year.

Using 200 Simple Moving Averages To Identify Trade Setups

At 10:00 am EDT, the market made a sharp upward move toward the 200 SMA, which was just above 1910. As the market approached the 200 SMA, would it break-through and keep traveling upward, or would the 200 SMA act as resistance?

At 10:45, the market came very close, almost kissing the 200 SMA, before it reversed course and started heading downward. At this point, the decision was made to catch the reversing market and SELL a Nadex spread, Here were the order details:

SELL US 500 1880.0 – 1920.0 (4:15 PM Expiry) – This is a 400 Tick Spread. Each Tick is worth $1.00, per contract traded
SELL Price – 1903
Maximum Risk – $170
Maximum Reward – $230

Profit Target – 50 Ticks, or $50
Loss Target -If the market reversed and broke the 200 SMA, the trade would be exited for a loss

Nadex Spreads paint a box around the market. The ceiling of the box (1920) represented the maximum risk. Since the order to SELL was at 1903, there was a maximum of 170 ticks at risk. The floor of the spread (1880) represented the maximum reward available for this trade, which was 230 ticks, or $230. The goal was to pick up 50 ticks and exit the trade.

The profit goal was reached within 45 minutes, and the trade was exited for $50 profit per contract traded (exchange fees not included). If 10 contracts had been traded, then the profit would have been $500.

On this trading day, the 200 SMA was a textbook resistance level, Once the market bounced off that level, there was a nice short-term SELL opportunity on the US 500 Index.

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