Updated: Jan 7
If you have spent some time here at Chartify.org, reading about different topics, you’ve probably heard us say that there is no such thing as the holy grail trading strategy. Having said that, there are some trading setups that are so commonly traded among traders that they become something of a self-fulfilling prophecy. Think of these common setups as your crystal ball of trading.
Trading strategies using support and resistance and SMA 200 are so commonly used that when price reaches these levels there is a very high probability that there will be some kind of reaction. The simple moving average (SMA) is probably the most basic indicator that traders have, it has a lot of uses. Partially because of this, it’s one of the most universal indicators used in both the stock market and the Forex market.
The market moves on consensus, so if there is something that everyone is following, then the mere fact that everyone is following that thing makes it predictive. For example, if everyone is using the SMA to figure out when the market will go up, the market will go up because there are enough people buying into it to push it higher. It’s almost like a chess board where all the chess pieces are lined up to make the next strike, except this is traders lining up to make a move in the market.
In Forex, the most commonly followed SMA is on the daily chart, and it’s the 200 SMA. You will often find it discussed in the financial press because it is closely followed by most major trading firms. The logic is that a 200-day trend is pretty sold, and it takes a significant change to move the market off of it. And once the market has moved to the new trend, it will stick with it for quite a long time. This makes it a good time to reevaluate your position in the market, and even change strategy.
Many long-term traders will put their stop losses around the daily 200 SMA, following the logic described above – of course adjusting them over time to keep with the trend. Also, there are day traders who are looking to profit from a likely bounce around the level.
Imagine walking on the train tracks coming up to a tunnel, before entering this tunnel you want to make sure that there are no trains headed your way, so you lay your hand on the tracks to see if you can feel any vibrations before you enter the tunnel. You can do the same thing in the charts by watching important levels.
Even if you aren’t planning on using the daily 200 SMA to trade on, you should keep it in mind when planning your trades. Have it somewhere present so you can be ready for when the market approaches the level, just to make sure you’re not entering a tunnel when a train is coming full speed your way.